The struggle and the patience paid off. This morning the Gemini bitcoin exchange opens for business, after a year-long process of getting regulatory approval from the New York State Department of Financial Services (NYSDFS). This authorisation is pretty big, much broader than the infamous BitLicense that the state requires of bitcoin operators. And Gemini is only the second exchange to get this approval. All of which is interesting, but not as interesting as the big picture behind it: this is the biggest step so far that Bitcoin has had towards going mainstream.
Let’s rewind a bit. First, the regulatory approval. A NYSDFS license, which grants permission to operate as a chartered limited liability trust company, is more rigorous and tougher to get (and I imagine a lot more expensive) than the BitLicense that New York requires of bitcoin operators. So why did the founders, Cameron and Tyler Winklevoss, choose this more complicated route? Because their main target market is institutional investors, to whom they would not be able to offer a complete service with just a BitLicense. The trust charter license that they now have allows them to 1) hold deposits, 2) operate a bitcoin exchange, and 3) offer other corporate trust services such as escrow (holding funds pending contract resolution). A BitLicense wouldn’t allow Gemini to do that. More importantly, the charter obliges the firm to act as a fiduciary, which means that it has to always put its customers’ interests before its own. That that even needs putting into law is sad, but this is the new frontier of financial services, and we’ve all seen the worrying headlines. For the Winklevoss twins, winning the trust of the large institutional investors is key. They felt that a BitLicense just wasn’t enough.
Gemini has competition. In May itBit was granted the same permission, and also offers OTC (over-the-counter) trading. And Coinbase classifies itself as a US-based bitcoin exchange, although it does not yet have the necessary regulatory approval.
But how will Gemini help Bitcoin to go mainstream? First, security. Safety has been the main priority, which is smart given the fears over Bitcoin’s lack of security and the “unregulated” nature of most exchanges. The founders have apparently been thorough in their dealings with the regulators, insisting on approval before trading. They are currently authorised to trade in 26 states and Washington DC, and are working on getting approval in the remaining areas. Customer deposits are held in FDIC-insured US banks, which means that the deposits are protected by federal insurance up to $250,000. And bitcoins are held in “cold storage”, which means offline devices such as pen drives, kept in vaults. (I’m not implying that itBit doesn’t make security a priority, the FDIC also insures itBit-held funds, and they also use cold storage for bitcoins… but read on…)
Another priority seems to be the visualization of information, also smart given that Bitcoin is quite hard to get your head around, and buying on online exchanges is confusing for first timers. Simplicity inspires confidence. The Gemini interface lets users visualize a graph showing the effect that their trade is likely to have on the market, even if it’s a small one. Get people familiar and comfortable with the idea of buying bitcoins for their investment portfolio, and you’ve gone a long way towards bringing Bitcoin into the mainstream.
Which will tie in very nicely with the upcoming launch of the Winklevii’s Bitcoin ETF (Exchange Traded Fund), the first publicly traded bitcoin-based investment trust. The twins are counting on more and more funds and private investors deciding to hold modest bitcoin positions, but without actually buying bitcoins (because either they don’t want to, or they can’t for regulatory reasons). These investors will be able to buy a NASDAQ-listed investment trust that will reflect the currency’s movements, but without direct exposure. The trust is awaiting regulatory approval.
At the moment the only alternative currency traded on Gemini is Bitcoin, although they haven’t ruled out changing that (notice that they didn’t put “bit” in the exchange’s name). In a Reddit AMA last night, there was some interest expressed in the trading of Dogecoin and Ether (the Ethereum currency). Tyler’s response was along the lines of “first Bitcoin, lots to do there, and then we’ll see”, so it’s unlikely that the portfolio of possible trades will spread much beyond BTC/$ in the short term. They are looking at opening up to other currencies, especially the Euro, but that will involve a lot of regulatory work, and the potential volume may make it not worthwhile.
So, what’s that about mainstream? Well, the Winklevoss twins are famous, not just because of their Facebook history. They’re media-friendly very wealthy ex-Olympic athletes. To give you an idea of their lifestyle, they came across Bitcoin for the first time while on holiday on glamorous Spanish island Ibiza. They’re New York elite, championing an alternative currency, and assuring their influential friends that institutional bitcoin investments will be safe and will do well. itBit is a reputable firm with a stellar management team and undoubtedly a good product, but without Gemini’s star power. This guarantees a certain amount of media attention. As a rudimentary metric, the number of entries that come up when you type “Gemini + bitcoin” into the Google search bar is over 480,000. Type in “itBit + bitcoin” and you get just over 87,000. So, the photogenic and well-connected Winklevoss twins are more likely to get Bitcoin into the mainstream press than equally able competitors.
And, there’s the emphasis on institutional funds. While their first customers are more likely to be early-adopter individuals, they plan on building up enough liquidity to attact the larger funds and Wall Street players. Until now, most Wall Street and bank activity in the sector has been through blockchain applications. Few have actually waded into bitcoin investment or trading. When that happens, the currency and the concept will get a credibility boost.
Which brings up the underlying existentialist dilemma. Bitcoin going mainstream would be good for the currency, increasing both liquidity and value, making some early purchasers wealthy, and attracting even more traders and investors. But, Bitcoin was not built on mainstream foundations. It started out as a decentralized, anti-institution concept, in part as a reaction to the financial crisis and the institutions that made it worse. So if those very same institutions start investing and trading in bitcoins, what happens to its reason for being? Does that even matter, when its use and value could significantly increase? Is Bitcoin embracing the institutions and the government, or is it the other way around?