Beyond Mt. Gox, bitcoin believers keep the faith, see more robust system

SINGAPORE Thu Feb 27, 2014 12:21am IST

Kolin Burges, a self-styled cryptocurrency trader and former software engineer from London, holds a placard to protest against Mt. Gox, in front of the building where the digital marketplace operator was formerly housed in Tokyo February 26, 2014. REUTERS/Toru Hanai

Kolin Burges, a self-styled cryptocurrency trader and former software engineer from London, holds a placard to protest against Mt. Gox, in front of the building where the digital marketplace operator was formerly housed in Tokyo February 26, 2014.

Credit: Reuters/Toru Hanai

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SINGAPORE (Reuters) - The apparent collapse of Tokyo-based bitcoin exchange Mt. Gox isn't bothering Anthony Hope and others who have ditched steady careers in government and finance to build bitcoin companies - and who stand to lose money they have in Mt. Gox.

Hope, a former British Treasury official and now head of compliance at Hong Kong-based MatrixVision, says that while Mt. Gox's fate is unclear, its troubles form part of a wider shift as more professional players move into the bitcoin mainstream.

"It's good for us as a business, not so good for us as consumers," he said. "Over the longer term it will be good for bitcoin because over time the entire ecosystem will be made more robust."

Steve Beauregard, CEO and founder of Singapore-based GoCoin, is more blunt about Mt. Gox's woes: "It's important in the sense of sweeping away a lot of the early unsophisticated folk who got into this and made a name for themselves, but didn't have the management horsepower to manage a company."

Mt. Gox, at one time the biggest bitcoin exchange, abruptly stopped trading this week amid reports on the internet that more than 744,000 bitcoins - worth around $380 million at prevailing rates - had been stolen. If accurate, that would mean around 6 percent of the world's 12.4 million bitcoins minted would be missing. The exchange's CEO Mark Karpeles told Reuters in an email that his company was "at a turning point" and would issue a statement "soon-ish." His LinkedIn profile reads: "I have a long experience in company creation, and experienced almost any imaginable kind of trouble."

On Wednesday, Japan said its authorities were looking into the Mt. Gox closure, and The Wall Street Journal reported that the virtual currency's exchange had received a subpoena from federal prosecutors in New York. A spokesman for the U.S. Attorney's office in Manhattan did not respond to requests for comment.

Also, the European Banking Authority warned bitcoin users they were on their own when it comes to losses from using unregulated online currencies, noting there is no safety net as with mainstream bank deposits. "Currently, no specific regulatory protections exist in the EU that would protect consumers from financial losses if a platform that exchanges or holds virtual currencies fails or goes out of business," it said in a statement.

Bitcoins rallied more than 10 percent on Wednesday, trading at close to $580, according to coinorama.net, which tracks the rate on various exchanges.

Graphic: How bitcoin works r.reuters.com/kuf86v

Graphic: Top bitcoin exchanges r.reuters.com/zem27v

Video: Big problem is regulation reut.rs/1mH0xor

"FINANCE HAS GOT BORING"

While bitcoin's public image remains one of a network of subversive, libertarian geeks, the past year or so has seen a change in the kind of people launching start-ups, say Hope, Beauregard and others in the fledgling industry.

Hope's colleagues, for example, include a serial entrepreneur, a former Morgan Stanley mergers and acquisitions specialist and a respected figure from the bitcoin community. Hope handled banking policy, taxation rules and freezing suspected terrorists' assets for the UK government before he moved to Hong Kong.

Antony Lewis, meanwhile, joined Singapore-based bitcoin exchange itBit from Credit Suisse last November. His colleagues include a former hedge fund analyst, a venture capitalist who invested in IT start-ups on behalf of the Singapore government and a former forex spot trader. "Finance has got boring in the past five years," Lewis said. "It's not fun, it's very backward looking and all the innovation is in virtual currencies."

Such companies are examples of a maturing - not just of the kinds of people attracted to bitcoin, but of the specialist roles companies play in the nascent bitcoin ecosystem.

MatrixVision, for example, helps bitcoin exchanges integrate with the traditional banking system by complying with local laws and regulations, while GoCoin acts as a "PayPal for bitcoin users", allowing merchants and others to accept bitcoins without the problems of currency volatility and security risk.

MORE DISCERNING USERS

For sure, the crisis surrounding Mt. Gox is the worst the young crypto-currency has faced, damaging trust and challenging all bitcoin-related companies to respond.

"Other major players need to show they avoid the mistakes Mt. Gox made, which they are trying hard to do," said Tomas Forgac, who founded Singapore-based Coin Of Sale, a service for merchants to accept bitcoins as payment.

That, adds Masa Nakatsu, a Japanese entrepreneur who this month founded his own bitcoin start-up, means bringing in more professional technology companies which are able to work with governments and central banks - a skill he says some of the early bitcoin players have not shown.

"Players will change," he says, "as the characteristics of the market change."

This shake-out is already underway as users learn to be more discerning about where to put or exchange their money.

ItBiT's Lewis says his exchange has seen a steady flow of funds and new accounts, with trading jumping to 10 times normal levels in just the past few days. "ItBit represents the next wave of exchanges where we care about customers and want to have a go at this," he says.

Lewis points to key questions that users need to ask of exchanges before entrusting money to them: how easy are they to hack? How well capitalised is the company? Are the deposits insured?

ItBit, he says, ticks most of those boxes. Clients' bitcoin funds are held on a computer that's not connected to the internet, and doesn't even have a hard drive or network card. Only itBit's funds are used for transactions. It has reached out to auditing firms to inspect its procedures and holds regular meetings with global regulators. Such things aren't cheap, says Lewis, noting ItBit has raised $5.5 million "and we'll need more as regulation gets tighter."

"The next generation of bitcoin companies will be run by people with previous experience of financial service companies and they will need to be capitalised like financial service companies," he says.

"VIBRANT ECOSYSTEM"

Beauregard, who divides his time between his Singapore start-up and his California home, says financing this won't be a problem. His GoCoin has raised $500,000 and is about to close out another round of funding. While the number of bitcoin companies raising six figure sums is limited, that will change, he said.

"Every venture capital firm will have to have their bitcoin plays in 2014," he said. "Otherwise they'll be missing the single greatest asset class that's emerging at the moment."

Hakim Mamoni, Hong Kong-based chief technology officer at bitcoin incubator Seedcoin, says a new raft of exchanges are set to appear in the months ahead. He declined to identify them, since most are operating in what the start-up world calls 'stealth mode.'

"That's why the Mt. Gox event is not troubling me," he said. "I know we'll have a vibrant ecosystem in a few months."

(Additional reporting by Chris Peters in BANGALORE, Kazuhiko Tamaki in TOKYO, Huw Jones in BRUSSELS and Lionel Laurent in PARIS; Editing by Ian Geoghegan)

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