Bitcoin Exchange False Start Caps Rough Month for Alternative Currency

Greater acceptance of Bitcoin as a payment alternative, including in B2B spheres, likely hinges on the involvement of regulation, even if the earliest supporters of alternative currencies promoted it as a alternative to traditional currencies and big banking. Despite some early Bitcoin supporters’ deep wariness of government involvement of any kind, efforts to develop a regulated exchange are underway. However, they’re not off to as smooth a start as hoped.

For a fleeting moment on Jan. 26, it seemed as though “the big step” to legitimize Bitcoin was taken. The Coinbase Bitcoin Exchange launched that morning and, on the surface, it looked like perhaps the most significant development for the alternative, digital currency to date. Its operators claimed that the exchange was insured and was to be regulated at the state level by about half of the states in the U.S. However, officials from two of the states—New York and California—put a hold on the exuberance by publicly proclaiming Coinbase was neither licensed nor regulated in either. At least New York officials admitted that some talks regarding eventual licensing had taken place, though nothing was finalized or promised by the launch date. Still, it was a hit for legitimacy that has yet to be untangled fully.

The Coinbase operators have been somewhat well regarded in the digital currency world and drew financial backing for the exchange’s launch from a number of top venture capitalists and even the New York Stock Exchange. Their support did not seem to waiver, at least in the initial days after the stumble.

The exchange’s false start came within days of CoinTerra, a Bitcoin "mining company" filed for Chapter 7 bankruptcy in the U.S. Bankruptcy Court for the Western District of Texas in Austin. In filing documents, the company listed between $10 million to $50 million in both assets and liabilities as well as 200 to 999 creditors. The filing follows on the heels of a lawsuit filed by Utah-based C7 Data Centers, which alleges a breach of contract and unpaid services by CoinTerra. It marked the largest filing related to the digital currency world since Mt. Gox collapsed under widespread allegations of fraud and mismanagement in 2014.

Early in the month, London-based Bitstamp, the second largest exchange for the alternative currency Bitcoin, suspended services in early January following a hack that accounted for more than $5 million in losses. Many familiar with alternative currencies did not view Bitstamp as a well-run or particularly safe exchange, dismissing it as a bump in the road for Bitcoin.That said, bumps in the road are expected, even by its strongest supporters.

- Brian Shappell, CBA, CICP, NACM staff writer

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