N.Y. issues charter to bitcoin firm

By May 7, 2015Bitcoin Business
Click here to view original web page at www.latimes.com
ItBit Trust Co., a New York start-up that allows investors to trade dollars for bitcoins, started operating Thursday under a banking trust charter that it says allows it to function legally in all 50 states. Above, bitcoin medals. (KAREN BLEIER, AFP/Getty Images)

NEW YORK — New York state issued its first charter for a bitcoin exchange, providing a major dose of legitimacy for the virtual currency as it begins to move from the margins of the financial system to the mainstream.

ItBit Trust Co., a New York start-up that allows investors to trade dollars for bitcoins, started operating Thursday under a banking trust charter that it says allows it to function legally in all 50 states.

The company also added three high-powered figures to its board and picked up $25 million in funding, further bolstering its stature and the growing acceptance of the digital currency.

The charter is an important step toward reassuring everyday investors that the bitcoin industry can be trusted to handle their money, said Charles Cascarilla, ItBit's chief executive and co-founder.

"So far, bitcoin hasn't approached regulation in a constructive way to allow mainstream use," he said. "We made the commitment not to take customers until we could do it on a really holistic and nationwide basis."

The charter means that ItBit will be subject to state audits and required levels of capital in the event of failure. ItBit said that under an agreement with an unnamed U.S. bank, accounts held in dollars will be insured by the Federal Deposit Insurance Corp.

Added to ItBit's board of directors are Sheila C. Bair, former FDIC chairwoman; Bill Bradley, the former Democratic senator from New Jersey and member of the Senate Finance Committee; and Robert H. Herz, a director of both investment banking firm Morgan Stanley and mortgage financing giant Fannie Mae.

ItBit's announcements represent the second major endorsement for the bitcoin industry recently. Last week, Circle Internet Financial, a consumer financial services firm using bitcoin technology, said it had raised $50 million from investors led by Goldman Sachs Group Inc., which publicly touted the Boston firm's management and prospects.

Bitcoin is a decentralized digital currency that uses peer-to-peer technology to operate, avoiding any central authority. It can have a large, direct effect on the international money exchange and transmission business, now dominated by big banks and players such as PayPal and Western Union.

But the broader bitcoin technology, which theoretically allows for the low-cost, verified exchange of a wide range of assets, has the potential to revolutionize money and payments in the way that the Internet revolutionized the rest of the economy.

"It's a lot like the early Internet," said Jerry Brito, executive director of Coin Center, a Washington, D.C., research center. "It's an open Internet protocol. You can build on it. In 1990 or 1992, there was no way you could envision the killer app was going to be Facebook or Twitter."

Long the object of fascination by financial and tech aficionados, bitcoin has yet to break through to the mainstream consumer market, marginalized by the virtual currency's price volatility and murky regulatory status, as well as the instability of key players. In 2013, for instance, the prominent Japanese exchange known as Mt. Gox crashed.

Slowly, however, regulators and the industry have begun to address some of the problems.

In response to the Mt. Cox collapse, Benjamin M. Lawsky, New York's superintendent of financial services, began to look into the idea of regulating bitcoin. As a stopgap measure, he issued an order allowing for the licensing of bitcoin exchanges under state banking law regulating trusts.

Several states have begun updating decades-old state money-transmission laws, originally created for telegraph services such as Western Union, to take into account the growing virtual currency business.

California hasn't decided whether to regulate bitcoin transactions, but "is getting very close to making a decision," said Tom Dresslar, spokesman for the Department of Business Oversight.

New York is in the final stages of issuing a separate BitLicense for regulating the industry in New York.

In January, San Francisco's Coinbase launched what it called "the first regulated exchange in the U.S.," citing money-transmission licenses in about two dozen states. The company provides services beyond exchange, including "wallets" to store the currency.

On its website, Coinbase says that exchange is available to customers only where "Coinbase is either

licensed to engage in money transmission, where it has determined that no such license is currently required or where licenses are not yet being issued."

The Coin Center's Brito said ItBit jumped ahead of the pack with its New York trust charter.

"What it is doing is incredibly clever, rather than taking the approach of operating in a legal gray area," he said.

However, not everyone believes ItBit has legal clearance to operate nationwide, including the lawyer for Coinbase, Chris Daniel of Atlanta.

"The New York state chartered trust company solves the New York problem. There is a question about whether it solves that same problem in other states," said Daniel, who co-chairs the Paul Hastings law firm's Payment Systems Practice.

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