The Establishment's Embrace Of Bitcoin: Good Or Bad?

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Shutterstock photo

Shutterstock photo

Yesterday, Coinbase, a startup backed by money from banks, venture capitalists and the New York Stock Exchange opened the first “fully regulated” U.S. Bitcoin exchange. The fact that this venture has the backing of some sections of the Wall Street mainstream, including two high profile former CEOs, Vikram Pandit of Citigroup (C) and Tom Glocer of Thompson Reuters, has produced a mixed reaction.

To those observing from the outside, it gives legitimacy to the whole concept of Bitcoin; I mean, if people like that are involved, can it really be the crackpot fad that some dismissed it as? Many enthusiasts, who embraced the virtual currency long ago though, have a different take. They feel like punk rockers in the London of my youth when The Clash signed with CBS. You want others to see the light and understand the value of something that exists outside the system, but when enough do, then the system inevitably embraces that thing, and the “outside” status is lost.

Anger and, to some extent disillusionment is an understandable reaction from early adopters in that situation, but the problem with that outlook is that a currency cannot exist only in the shadows for long. Eventually some kind of mainstream acceptance and commercialization has to come. There is one powerful reason that Wall Street is now embracing Bitcoin. The number of merchants accepting the currency more than doubled last year to over 80,000. It is too big now to be ignored, and for that even the most ideologically motivated supporter should be glad.

To hear some of the media coverage of the news yesterday you would think that Coinbase’s exchange launch was actually bigger, and more fully regulated, than it will be, at least initially. The exchange will operate in only 24 states in the U.S., with varying degrees of regulation. The real test of the prospects for the expansion of Coinbase, and others with similar plans, will come when the New York Department of Financial Services (DFS) finishes its investigation into virtual currencies and offers the final draft of its regulatory outline. That will most likely form the framework for regulation elsewhere and if the regulatory environment is not stifling, Coinbase will be able to expand into all 50 states rapidly.

One of the biggest advantages of the likes of Pandit and Glocer, along with banks such as USAA and Banco Bilbao Vizcaya Argentaria (BBVA), being involved with this project is that their presence makes it more likely that that regulatory environment will be manageable. They have experience of dealing with regulators and shaping regulations to their advantage. What remains to be seen, of course, is whether that is also to the advantage of the broader Bitcoin community. With an idea in its infancy, though, anything that persuades regulators to approach with a light touch is probably preferable to strangulation by regulation, even if that means some representatives of the existing status quo benefiting disproportionately.

When threatened, the financial establishment, like the music business, usually goes through a three stage process. First it ignores the threat, then it argues against it, then it buys it. With Bitcoin, it now seems that we are in stage three. In its short life, Bitcoin has already faced many seemingly pivotal moments, but it has survived and if the growing ecosystem surrounding the currency is evidence, even thrived. If it can survive the “friendly” attentions of the Wall Street establishment and regulators, then it will emerge stronger still.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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