Digital Currency Grows Up
A growing number of US investors, traders, financial institutions and businesses wanted to get involved with digital currencies, of which Bitcoin in the most recognised.
Cameron and Tyler Winklevoss (pictured) were among a group of investors who put $1.5 million into BitInstant, a bitcoin exchange founded by a guy named Charlie Shrem. Shrem was also a founding member of The Bitcoin Foundation, the not-for-profit created to oversee the bitcoin digital currency. He’s now in federal prison.
Shrem was sentenced to two years for aiding and abetting the operation of an unlicensed money transmitting business used to launder Silk Road drug money. BitInstant is no more.
But like many people, the Winklevoss twins still believe in bitcoin—strongly. Recently, they unveiled their own bitcoin exchange, dubbed Gemini, after New York’s financial regulator approved the service for use in the state.
The New York State Department of Financial Services granted Gemini what’s called a limited liability trust charter under New York banking law. In the past, this kind of charter was used to regulate “trust banks” such as State Street and Rockefeller Trust. But the state says it also allows for the operation of a virtual currency exchange, where people can swap dollars and other fiat currencies for bitcoin and vice versa. The state granted a similar charter to another bitcoin exchange, ItBit, this past May.
The arrival of Gemini underscores how the bitcoin landscape has changed over the past year and a half. In early 2014, the feds arrested Shrem. That same year, Mt Gox, the world’s largest bitcoin exchange, went bankrupt after saying that hackers had stolen $460 million in bitcoin from the company’s online systems. But a new wave of companies is working to create bitcoin infrastructure that’s more reliable—that plays nicely with local laws, rather than trying to work around them. The San Francisco-based Coinbase and the Massachusetts-based Circle are two other companies that have taken this route—though they have gone about things slightly differently from ItBit and Gemini.
“You have to get regulation right,” says Tyler Winklevoss. “You have to have a dialogue with them on what you’re doing and you have to be compliant, which means getting the appropriate licenses on a state-by-state level, on a federal level.”
Moving Past Cut and Paste
According to the Winklevoss twins—well known for winning $65 million in a lawsuit claiming that Mark Zuckerberg stole their idea in creating the Facebook social network—Gemini is meant for “institutional investors,” meaning big banks and the like. “We think it’s crucial for bitcoin infrastructure to get the larger financial institutions involved,” Tyler Winklevoss says. “We’re treating this much more like a bank than as a money transmitter.”
That said, the exchange can also be used by individuals. And it’s open to users beyond New York. The kind of New York trust charter granted to Gemini is recognized by other state regulators. The company says that the service is now available in 27 states, including California, and the Winklevoss twins say they’re working to receive explicit approval from each state. “Some states are honoring reciprocity with the New York Department of Finance,” says Cameron Winklevoss. “Other states want more clarification.”
'We think it's crucial for bitcoin infrastructure to get the larger financial institutions involved.'
This differs from itBit, which immediately launched in all 50 states after receiving its New York trust charter, claiming that the charter allowed it to do so. Meanwhile, Coinbase, which offers an exchange as well as online “wallet” services for storing and sending bitcoin, has not gone the trust charter route. Instead, it’s choosing to wait for a New York BitLicense, a new kind of certification specifically for virtual currency operations. Earlier this month, the state granted the first BitLicense to Circle, which also offers wallet services.
More explicit regulations are clearly needed, as once again the pace of technological change has outstripped government’s ability to keep up. In January, before the arrival of the BitLicense, Coinbase announced that its exchange was “supported” in 24 states, including New York and California, thanks to existing regulations. New York regulators later said that the service did not have approval to operate in state. The previous March, New York invited bitcoin exchanges to apply for a trust charter, saying that these exchanges would ultimately have to meet the requirements of the BitLicense.
Tyler Winklevoss says that Gemini applied for a trust charter rather than a BitLicense, because this would allow it to serve institutional investors. In short, bitcoin’s regulatory situation is far from straightforward. “Prior regulation,” Coinbase founder Fred Ehrsam told us earlier this year, “is being applied in a cut-paste manner.” But things are at least moving forward.
Bitcoin promises to provide an easier way of sending and receiving money free of the usual restrictions of national currencies and boundaries. Though it has achieved some of that promise, its progress into the mainstream has slowed after the implosion of Mt. Gox in particular. At the same time, the technology itself is moving forward.
