The launch of the U.S.'s first regulated bitcoin exchange gives an already curious merchant base more of a reason to jump into virtual currency.
Coinbase on Jan. 26 announced the launch of the regulated exchange, saying its goal is to bring "increased stability" to the Bitcoin ecosystem. The move is separate from but closely timed with NCR's move to add Bitcoin support to its Silver point of sale technology near the end of 2014. NCR, a longtime vendor of ATMs and other payment technology, has noticed a slow and steady interest from merchants in digital currency.
Coinbase's regulated exchange should go a long way in addressing the fears of merchants who may have been on the fence about accepting Bitcoin, said Reggie Kimble, director of busienss development for NCR Small Business.
"The fact that it's regulated is very helpful, when you speak to merchants about Bitcoin There's a lot more ways to accept payments now, there's a lot you can do outside of mainstream payments," Kimble said.
In a note to PaymentsSource, Coinbase's external public relations company said large institutions such as the trading division of Second Market are trading on the platform, while Coinbase users in the 24 states can store U.S. Dollars in wallets on Coinbase, enabling them to trade immediately.
The regulatory nod for Coinbase will provide a catalyst for merchants looking for alternative payment methods, but on the fence about bitcoin, said NCR's Kimble. "You'll see more growth as the market evolves, more advancements like the Coinbase expansion will happen, and there will be a mainstream acceptance of Bitcoin, which to a certain degree now is new and fresh but still in its early stages," Kimble said.
Coinbase, which also operates in Europe and other markets, last week received a $75 million funding round from investors as BBVA, USAA and the New York Stock Exchange, granting them a view into the potential of Coinbase's underlying technology.
Even if the financial institutions do not actually process Bitcoin transactions, the investment still lends credibility to Coinbase, which in addition to the regulatory coverage gives Coinbase the mainstream recognition lacking from earlier, more controversial bitcoin exchanges, such as the failed Mt. Gox.
Coinbase now appears to have an edge over other ventures targeting the U.S.-based Bitcoin market. Cameron and Tyler Winkelvoss, who were connected to Facebook's founding, are leading the build-out of Gemini, a regulated U.S. bitcoin exchange that announced on Jan 23. Gemini did not return a request for comment.
Another company, Coinsetter, in the fall revealed a U.S.-based Bitcoin exchange, and is working on extending its regulatory licensing in the U.S., Coinsetter CEO Jaron Lukasiewicz said in an email.
"Creating a U.S.-based Bitcoin exchange is a challenging project given its security needs, the high performance technology required of an institutional-class system, and the regulatory hurdles that companies must overcome to provide domestic U.S. bank transfers to their customers," Lukasiewicz said in the email. "We will be working hard this year to extend our regulatory licensing and from a technology perspective, there isn't a trader in the space who wouldn't benefit from using our institutional exchange."
Coinsetter did not address its current level of regulatory coverage. In direct response to Coinbase's announcement, Lukasiewicz said: "It took Coinsetter two years to build our institutional exchange technology, but this focus on quality allows us to continue serving professional traders with a high end product that is difficult to replicate."
What Coinbase and other providers need is consumer demand, which is still uncertain, said Rick Oglesby, a senior analyst and consultant at Double Diamond Payments Research.
"Merchants really like Bitcoin because it's inexpensive to accept, so it's not surprising that merchant technology providers are responding to merchant demand," Oglesby said. "However, consumer demand to use it is not high at the moment. Until that changes, these investments are attempts to create a market. Consumers are the only ones that can really make digital currencies work at scale."
The rule of thumb for most merchants is that the more payments they accept, the more likely they are to close the sale, said Zil Bareisis, a senior analyst at Celent.
"Having said that, most merchants today that accept Bitcoin don't hold funds in Bitcoin and exchange them back into a fiat currency right away." Bareisis said. "Also, physical merchants accepting Bitcoin are taking the risk if the consumer is walking away with goods before the transaction is confirmed."