BTCGlobal: Commoditizing The Bitcoin Exchange
As Coinsetter CEO Jaron Lukasiewicz pointed out in his letter last week, Bitcoin exchange is rapidly becoming a capital-intensive industry. On a technical level, Bitcoin exchanges are under constant attack by sophisticated hacking attempts and increasingly powerful DDOS attacks to the point that it is becoming impossible to survive without a dedicated, locally hosted server and Cloudflare protection. From a banking standpoint, relatively easy deposit and withdrawal solutions like Liberty Reserve, OKPay and Dwolla have all fallen by the wayside, forcing exchanges to either step up their efforts on banking integration or fall away. And, finally, the worst hit of all is regulatory: since the FINCEN guidance released in March, it has become clear that exchanges operating in the US need to pay a minimum of about $100,000 per year for surety bonds as well as having comprehensive anti-money-laundering policies, and in the last month the US government has struck hard against services like Liberty Reserve and MtGox that it believes are not meeting the requirements. Although the big exchanges, including Coinlab, Coinbase and Tradehill, appear to be well on their way to full compliance, an increasing prevalent worry is, will any future exchange be able to get over the hump?
BTCGlobal has come up with an innovative solution that just might shift the tide significantly back in favor of the little guy. BTCGlobal’s plan, which the company entitles “Massive Parallel Licensing“, is essentially a franchise: BTCGlobal will pool together resources from any upstart exchanges that want to be partners, secure the necessary money transmitter licenses and surety bonds, and allow its partners to operate under its umbrella. In addition to this formal legal relationship, BTCGlobal will also share its expertise on implementing the anti-money laundering programs that money transmitter laws require. The program goes beyond just this; on a technical level, BTCGlobal will make available BTCUy, its powerful trading engine which can handle 300,000 transactions per second (to compare, MtGox crashed in April because its trading engine was limited to 37 transactions per second, and the Bitcoin network itself averages about 0.7 per second). Speed is not the only advantage of having one commonly developed platform; it will also improve security, as BTCUy is much less likely to have a vulnerability due to amateur coding or security setup.
The main question is, just how effective will this franchise be? In theory, the project certainly will massively reduce startup costs from a technical and regulatory standpoint, leaving the individual exchanges to focus on the very thing that Bitcoin exchanges currently need to focus on the most: convenient, easy-to-use deposit and withdrawal options. On the other hand, the legal umbrella concept may turn out to be fragile. The major reason why some banks and established money transmitters are currently scared of dealing with Bitcoin exchanges is that they fear losing their own banking or money transmitter licenses if the partner turns out to have inadequate anti-money-laundering policies; here, similarly the onus is on BTCGlobal to make sure that each and every one of their franchisees remains compliant. Given that the question of just how strict anti-money-laundering policies need to be is still a grey area, this may become a point of contention down the line.
If BTCGlobal succeeds, we can expect to see a diaspora of local Bitcoin exchanges appear targeting very specific banking systems or even individual cities, making buying and selling bitcoins much easier. If it does not, then the Bitcoin exchange industry will still progress, but with Silicon Valley investors as necessary gatekeepers as new exchanges struggle to raise the necessary capital for money transmitter licensing. Alternatively, Bitcoin exchange may increasingly go decentralized, with Bitcoin communities in many major cities gaining the critical mass to support in-person trade on localbitcoins. Finally, it is important to keep in mind that the United States is not the only end goal for Bitcoin. It is certainly important, especially since legacy banking systems in the country tend to be much less efficient than their counterparts in Europe, but entrepreneurs thinking of creating Bitcoin exchanges should well consider serving the markets in Europe and Canada instead; laws in both countries are much less restrictive, with the Canadian FINTRAC even explicitly stating that Bitcoin exchanges in the country do not need a money transmitter license. On the whole, developments like this are increasingly making it clear that the Bitcoin exchange industry in all parts of the world has both the will and the capability to meet the challenges of a regulated financial world; it is up to all of us to help it prosper.