A turn towards small local Bitcoin exchanges could keep the digital currency out of trouble while preserving the self-sufficient ethos of the Bitcoin community.
This idea is taking hold after the Department of Homeland Security seized funds tied to Mt. Gox, the largest Bitcoin exchange, from accounts at Dwolla and Wells Fargo. Mt. Gox, of Tokyo, is accused of operating as an unlicensed money transmitter.
"Regionalism is going to win out; all major financial institutions started out this way," says Alex Matviychuk, an entrepreneur hoping to start a local exchange in Northwest Oregon, at the Bitcoin 2013 Conference last weekend. Matviychuk was previously employed by Goldman Sachs.
Many people in the Bitcoin ecosystem say the market's current reliance on Mt. Gox has disadvantages. A dependence on one company to exchange the digital cryptocurrency for cash makes price fluctuations more volatile. For example, recent hacks on Mt. Gox caused consumers to panic and sell off their bitcoins, prompting the currency's value to drop from $260 to around $70 several weeks ago.
"Once you create a centralized point you open yourself up to attack," Matviychuk says.
Bitcoin is a digital currency designed to facilitate irreversible and nearly-anonymous transactions. Though it is accepted by a growing number of mainstream businesses, it has also attracted the scrutiny of government regulators and law enforcement agencies.
Matviychuk says it might be easier for the government to crack down on Mt. Gox than to target numerous smaller exchanges. BitTorrent, a peer-to-peer file sharing protocol, is an example of an ecosystem that was too widespread and evasive for the government to control.
"We need to make it more expensive to go after everyone so that the government decides it's not worth it," he says.
There's "strength in numbers," Matviychuk says. This phrase is printed on a collectible coin, made by Casascius LLC, that some devotees use to represent their bitcoins.
But there's still a worry that banks, seeing Bitcoin businesses as risky, will suddenly close those companies' bank accounts, like Capital One Financial Corp. did to Bitfloor, a U.S.-based Bitcoin exchange.
Many other entrepreneurs at the conference were vocal of the merits of smaller exchanges.
Josh Rossi, a 31-year-old New York-based Bitcoin devotee, has been receiving attention for organizing Satoshi Square, a meetup for people that want to buy and sell bitcoins in-person at Union Square in Manhattan. This is part of his Project Buttonwood, an open-source software platform built to facilitate in-person group exchanges and provide an order book for the buying and selling of bitcoins.
The company name pays homage to the stock brokers of the late 1700s that sat under a buttonwood tree and signed an agreement to start the New York Stock Exchange and Board.
"The reliance on centralized exchanges is not in keeping with the ethos of Bitcoin," Rossi said during a presentation at the conference. "It's meant to minimize the trust relationships necessary, not maximize them. In order to have more liquidity we need to have something more distributed and decentralized."
Even though Bitcoin is a digital currency for transacting over the internet, these in-person exchanges also bring the vibrant Bitcoin community together, he says. Plus it allows people not familiar with Bitcoin and those not tech-savvy to participate in the ecosystem.
The biggest problem right now is the lack of exchanges, said Jay Shore, CEO of Coinabul, during an international business panel discussion. Coinabul is an online marketplace where customers can exchange bitcoins for silver or gold.
More infrastructure is needed, says Charlie Shrem, CEO of BitInstant, an exchange that allows direct online bank transfers for merchants that want to transfer bitcoin payments into cash immediately.
But "exchanges are wholesale," says Shrem. Mainstream consumers shouldn't buy from exchanges in the future but instead work with retailers, like BitInstant, to get into the Bitcoin ecosystem, he says. Retailers can offer consumers an easier way to get into the system and a better user experience, he adds.