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Emerging Payments

As Bitcoin Moves More Mainstream, It Loses Cash-Like Traits

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Coinlab Inc., a Bitcoin services company, is partnering with the largest Bitcoin exchange in the world to facilitate Bitcoin transactions in the U.S. and Canada. The deal could promote Bitcoin use, but Coinlab's existing relationship with Silicon Valley Bank could compromise the cryptocurrency's key trait —anonymity.

Bitcoin is designed to be used for electronic payments much like cash is used in face-to-face transactions. However recent moves threaten to impair Bitcoin's cash-like anonymity by tying it to a system with stringent know-your-customer requirements. In an earlier example, a digital currency exchange brought its operations under French regulation.

Coinlab working with SVB "is another step towards integrating Bitcoin into the legacy payments ecosystem," says Aaron McPherson, practice director for payments and security at IDC Financial Insights.

Coinlab has a standard demand deposit account with Silicon Valley Bank to facilitate getting money in and out of the Bitcoin marketplace.

"This move will bring US-style product delivery, liquidity and customer service to a huge group of Bitcoin fanatics," says Peter Vessenes, Coinlab's CEO.

U.S. and Canadian customers currently transacting with Mt. Gox will transact through Coinlab, as of March 29. Coinlab's relationship with SVB makes it susceptible to bank and money transfer regulations. For example, if Coinlab's deposits reach the anti-money laundering regulation threshold, SVB will have to start reporting cash flow details the Financial Crimes Enforcement Network (FinCEN), McPherson says.

Coinlab is also registered as a money service business with FinCEN, says Carrie Merritt, director of public relations at SVB.

"Like any new business we are looking at it very carefully and we are willing to entertain the idea while monitoring the industry closely," she says.

McPherson says the relationship might compromise the key concepts behind Bitcoin. "If there aren't legal remedies now, [regulators] will make them as soon as Bitcoin shows signs of significant scale," he says.

McPherson also notes that new laws allowing merchants to surcharge for credit card transactions could reduce the incentive for merchants to accept Bitcoins, because it's no longer saving them money. Plus merchants "lose infrastructure when moving to Bitcoin," McPherson says. Retailers lose reporting and customers service opportunities since the currency is anonymous.

CoinLab will be helping Mt. Gox operate in the U.S., a system which can be tricky to plug into from afar, says Vessenes. The company wants to push the tiny liquidity pool of Bitcoin in the U.S. more deeply into the American financial system, he says.

Mt Gox "just isn't here and it's not a part of the American system the way we are," Vessenes says. Coinlab, the first U.S. venture-backed Bitcoin company, was funded by investors in April 2012.

Mt. Gox is based in Shibuya, Tokyo. The exchange provides around 80% of global Bitcoin trading volume. Because of the time zone difference, Mt. Gox customers in the U.S. and Canada had to worry about delays receiving withdraws and customer service help.

Now North American consumers can buy and sell Bitcoins faster and more transparently within Coinlab's trading platform, powered by Mt. Gox which will provide the back-end exchange clearing services. Bitcoins will be held securely by Coinlab, which will handle customer accounts, withdrawals and deposits.

The transition also means consumers using the platform will be able to contact a Coinlab employee located in the U.S. for customer service.

"[$30 million to $40 million] is exchanged between U.S. and Canadian Mt. Gox customers," says Vessenes. "This is good but it should be in the billions. The reason it's so low is because just like access in the States is hard, safely storing and understanding how to get [Bitcoins] is hard."

Merritt says SVB is closely watching the path Bitcoin is taking. "Since we work with innovative companies and their investors and this is an emerging, potentially interesting area, we are checking it out," she says.

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