Tuesday, July 1, 2014

First U.S. Bitcoin Exchange Closer Than You Think

It seems strange given the strides that Bitcoin has made over the past year, but there still is no official, regulated Bitcoin exchange in the United States.

But that is going to change very soon - probably within the next few months. And with a full slate of contenders, we're likely to see several Bitcoin exchanges operating in the United States by the end of the year - most or all of them based in New York.

As it is now, people can buy Bitcoin from services like Coinbase and Bitpay, but they conduct no trading. Those companies then need to buy bitcoins from the overseas exchanges like Bitstamp.

bitcoin exchange So while it's not difficult to buy Bitcoin in the United States, having at least one U.S.-based, blessed-by-regulators Bitcoin exchange will open new doors for the digital currency.

The biggest benefit is that it will give many Wall Street players - who have until now been watching from the sidelines - the green light to jump in.

"There's a huge class of investors who will not get in until they can do it in a safe way, where their clients are protected," Jesse Powell, co-founder and chief executive officer (CEO) of Payward, which operates the Kraken digital currency trading platform, told Institutional Investor.

And interest from Wall Street will not only speed broader adoption of Bitcoin, but it will drive the Bitcoin price much, much higher.

The starting gun for the first U.S. Bitcoin exchange was actually fired in March when the superintendent of the New York Department of Financial Services (NYDFS), Ben Lawsky, announced his agency would be taking applications for a fully regulated New York-based exchange.

In that announcement, Lawsky also said his agency "intends to propose that regulatory framework no later than the end of the second quarter of 2014."

The second quarter ends Monday, so we should be getting the NYDFS's eagerly awaited guidelines for a Bitcoin exchange early next week.

And shortly afterward we could see applications from as many as half a dozen entities seeking to become the first official U.S. bitcoin exchange.

Here's a look at the groups in the running...

The Main Contenders for the First U.S. Bitcoin Exchange

Three companies are known for certain to be interested in launching the first U.S. Bitcoin exchange: Kraken; SecondMarket, which also operates a Bitcoin hedge fund, the Bitcoin Investment Trust; and Atlas ATS (alternative trading system), which is already running a globally integrated digital currency trading system.

Each has its strengths, but Gil Luria, an analyst with Wedbush Securities who has been following Bitcoin, gives the early nod to Atlas.

"I'd say right now Atlas ATS is probably ahead," Luria told Institutional Investor. "They have a platform. They have experience with the technology. They are moving toward getting the regulatory stature, and so far they've seemed to hold up in terms of security."

Atlas also has a relationship with hedge fund Bay Hill Capital Management, which serves as a market maker for Atlas and can help provide liquidity.

Meanwhile, SecondMarket CEO Barry Silbert is eager to point out the advantages his company has.

"Because SecondMarket is a broker-dealer, it already has regulatory stature," Silbert told Institutional Investor. And since SecondMarket is involved in OTC trading, it "already sees a lot of liquidity."

Kraken is a platform for trading among several of the leading digital currencies (like Litecoin, Namecoin, and Ripple in addition to Bitcoin). It is a well-established exchange in the Bitcoin community, but lags SecondMarket and Atlas in regulatory stature.

Kraken is licensed to trade currencies in just five states now, although it expects to be licensed in every state within a year.

Getting certified state by state is doing it the hard way, though. The shortcut to getting approved for Bitcoin trading in the United States is to have a relationship with a federally chartered bank. In one swoop, a company could get nationwide regulatory status.

"If Kraken or Atlas or one of the others gets a relationship with a bank, that will be a giant step forward," Luria said.

The Wild Card Contenders for the First U.S. Bitcoin Exchange

In addition to Kraken, SecondMarket, and Atlas ATS, two other Bitcoin companies are in the race to be the first U.S. Bitcoin exchange: Coinsetter and Buttercoin.

Based in New York, Coinsetter has already constructed an exchange platform designed to make it easy for big Wall Street firms to participate. And Buttercoin, based in Palo Alto, Calif., already provides some Bitcoin exchange services to other companies.

And according to a recent report in the New York Post, venture capitalist and Bitcoin evangelist Mark Andreessen requested information from the NYDFS about its forthcoming regulations and what would be required of a Bitcoin exchange.

But the wildest wild card would be if Nasdaq, one of the nation's two major stock exchanges, joined the game. The same New York Post story said that the nearing deadline for the NYDFS rules had sparked internal discussions at Nasdaq about how to take part in the Bitcoin surge of popularity.

A player with the heft of Nasdaq would have huge advantages over any of these other companies. What's more, having a Nasdaq-sponsored Bitcoin exchange would give the digital currency maximum credibility, sparking even faster acceptance by Wall Street's big boys.

Still, any fully regulated U.S.-based Bitcoin exchange will have a dramatic impact.

"Once institutional investors can get in, it will raise the profile of Bitcoin and you'll have more players with a stake in the outcome," Payward's Powell said. "Those guys have deep pockets and influence in Washington and elsewhere. Once they are in Bitcoin as a whole will be much more secure."

What impact do you think the first U.S. Bitcoin exchange will have on the Bitcoin economy, and in particular the Bitcoin price? Let us know on Twitter @moneymorning or Facebook.

UP NEXT: Right now U.S. investors can't buy a Bitcoin stock on a major U.S. exchange. But there's an ambitious Bitcoin mining company that has vowed to go public on a major exchange within the next year. This could well be the first Bitcoin IPO ever...

Related Articles:

Institutional Investor: The U.S. Is Bitcoin Trading's Next Frontier NYDFS: Public Order on Virtual Currency Exchanges New York Post: It's David vs. Goliath in Race to Launch NY's First Regulated Bitcoin Exchange

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