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Breakingviews

Bitcoin Comes Out of the Shadows and Into Wall Street’s Sights

At the end of a panel discussion at the Inside Bitcoins conference in New York this week – billed as the largest such event in the world – a supporter of the cryptocurrency pointed to one of the three lawyers discussing Bitcoin’s struggle for mainstream acceptance.

“You all say you want Bitcoin to just work,” he said. “But the only way that will happen is if regulators are completely out of the way.”

There’s a fat chance of that with all the attention lavished recently on Bitcoin, which on Wednesday reached a new peak of financial industry acclaim with Goldman Sachs’ first investment in the technology via Bitcoin finance start-up Circle.

It’s a sign of a pivotal change. Die-hards like the conference questioner will mourn the lost privacy and edginess of Bitcoin’s geeky existence. The flip side is that mainstream financial industry acceptance is in sight.

The digital currency, which emerged six years ago from the computer of a programmer calling himself Satoshi Nakamoto, is entering a new age, one where its future will be guided mainly by the likes of Goldman Sachs, Wall Street’s premier investment bank, and a growing flock of lawyers.

This week’s conference nicely illustrated Bitcoin’s efforts to emerge from the shadows. For starters, the panel in question was entitled “Beyond Mt. Gox and Silk Road,” referring to the signature scandals that have largely defined the world of cryptocurrencies in the public’s eye. The former was a Bitcoin exchange that went bust, mainly as a result of incompetence, losing some $450 million. The latter was a dark drug racket that foolishly relied on Bitcoin’s apparent anonymity to cover up its users’ identities.

Some panels looked at the mechanics behind Bitcoin, but the most widely attended sessions were about regulation. These had titles like “Emerging Issues in Regulatory Compliance and Law Enforcement Efforts,” “Banking MSBs: A Compliance Officer’s Perspective” and “How to Stop Bitcoin Theft.” If there is to be a grand future for Bitcoin, it will not be as a reserve currency to replace the dollar or yen or as a subfusc network for anarchists, libertarians or mobsters. Rather, it will be as a tool for the financial services industry.

“All of us are invested in the price of Bitcoin going up, and you can forget about the price going up and you can forget about mainstream adoption unless regulators get involved,” said Ted Rogers, chief strategy officer at Xapo, a start-up that combines “the convenience of an everyday Bitcoin wallet with the security of a deep cold storage vault.”

Mr. Rogers – also a trained lawyer – is betting his career on Bitcoin crossing into the mainstream, “because net-net, a regulated Bitcoin that helps everybody is better than one that operates in the shadows.”

To wit, Goldman unveiled its first investment in a Bitcoin business, jointly leading a $50 million funding round for Circle along with the Chinese venture capital firm IDG Capital Partners. Rather than a passive investment, this is a bet made by the Wall Street firm’s principal strategic investments group, a division that puts money to work in start-ups that could disrupt – or in this case, make more efficient – the way the bank does business.

Again, it’s not Bitcoin as a borderless currency or a store of value that’s intriguing to Goldman so much as its underlying technology. Every Bitcoin and all users are encrypted with a unique identity, and each transaction is recorded on a decentralized public ledger, known as a blockchain.

The Congressional Research Service put it this way in a white paper prepared for United States legislators: This “solves the so-called double spending problem (i.e., spending money you do not own by use of forgery or counterfeiting) and the attendant need for a trusted third party (such as a bank or credit card company) to verify the integrity of electronic transactions.” The application of blockchain technology could be spread across the sorts of activities that Goldman engages in, principally the trading, settling and clearing of securities.

First, however, Bitcoin has to become legit. That means “working within the existing regulatory regime and its constraints,” according to Constance Choi, another lawyer who advises digital currency companies and attended the Bitcoin conference. Indeed, 17 of the 26 pages produced by the Congressional Research Service are dedicated to legal and regulatory issues.

For Bitcoin pioneers and purists, all of this may be hard to swallow. Acquiescing to federal government watchdogs and hard-nosed bankers couldn’t be further from the original idea.

Like it or not, though, that’s where Bitcoin is headed – and where its real mettle will be tested.

Rob Cox is editor of Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.

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