Competition in the US bitcoin exchange market continued to escalate last week with the announcement by New York-based itBit that it would open to consumers in all 50 US states.
The decision comes amid a time when many US exchange market participants appear to be jostling for position ahead of the release of the final BitLicense regulatory framework this May. Coinbase launched its exchange product to customers in 24 states in January, while the Winklevoss Capital-backed Gemini intends for its launch to coincide with the release of the BitLicense.
Despite the number of entrants competing for a small but burgeoning market, itBit CEO Charles Cascarilla is confident that his exchange has done enough to separate its product owing to its status as “the only regulated entity in the entire bitcoin world”.
Along with its announcement that it raised $25m as part of its Series A, itBit revealed it had secured a banking charter from the New York State Department of Financial Services (NYDFS).
In a new interview, Cascarilla cited the inability for other exchanges to offer regulatory assurance to large institutional investors as a competitive advantage that would set his firm apart, one that was hard fought, but won by following the rules.
Cascarilla told CoinDesk:
“Mainstream adoption is not going to happen if you circumvent the financial system, you’re going to have to be a participant in it. That doesn’t mean bitcoin isn’t disruptive. It is in important and very valuable ways, but that disruption will never be able to reach its full potential unless you’re able to interface with the system.”
In this light, Cascarilla sought to position itBit as the beneficiary of a strategy that was set in place some 15 months ago when the company decided to obtain a trust charter, a compliance attribute he framed as necessary for any of its competitors.
“Having a BitLicense will not allow you to operate an exchange in the state of New York,” Cascarilla continued. “The NYDFS, its view of the law is that you need to operate as a qualified custodian and they make that clear in their directives, a BitLicense doesn’t make you a qualified custodian.”
Cascarilla further positioned itBit as a platform that he believes has the sound structure to compete on a global scale, boasting more than 40 employees and staff operating across time zones in Singapore and New York.
Chicken and egg
Overall, Cascarilla framed itBit as the most immediate solution to bitcoin’s challenge of gaining traction in what has been a largely unregulated market in the US, or at least one fraught with significant complexities.
Cascarilla acknowledged that there were other ways bitcoin service providers could become regulated, but argued that no matter which option a company chooses, the end result would be about accomplishing something that has been difficult – engendering market trust.
“I think there’s been a misunderstanding of what being regulated means, and I think that ultimately is where the rubber hits the road because financial institutions are willing to trade on you and feel comfortable with you and that’s ultimately what matters,” he said.
Should each of itBit’s current competitors in the exchange market achieve a similar goal, Cascarilla said he remains unworried about potential market competition, citing the fact that $5.5tn in foreign exchange (FX) transactions are completed daily.
“I don’t think bitcoin is a small opportunity set,” he said.
Money transmission
What may be most unique about itBit’s approach is its decision not to attempt regulation under money transmission laws, a process that requires obtaining permission on a state-by-state basis.
“You can get a money transmitting authority and to us that felt like the wrong way to do it because we’re not a money transmitter, we’re an exchange. We’re not moving funds on behalf of our customers,” Cascarilla said. “If you deposit funds with us, you can only withdraw funds to yourself, you can’t withdraw funds to anyone else or me.”
Cascarilla said that itBit intended to only operate as a custodian of customers funds, holding wallet accounts for users, making regulation under banking law more apt and appealing.
Still, he framed the trust as a necessary component of this strategy, arguing that to run an exchange in New York, bitcoin companies would need to secure a trust. “A BitLicense will not get you that,” he said.
According to Cascarilla, however, itBit will operate differently than banks in that it wouldn’t be able to extend loans to users.
“We’re purely an agent, we’re a custodian and fiduciary,” he continued. “There’s a variety of exchanges and exchange clearing organizations that are organized as a New York trust and operate on a global basis using that charter.”
Exchange attributes
Though Cascarilla framed regulation as a large part of itBit’s competitive advantage, he suggested there were other factors that would make the company a compelling option for traders, including its international liquidity.
Originally launched in Singapore, itBit continues to operate in Asia, migrating to New York primarily as a means to secure its banking charter.
“Right now our US dollar market share is between 4% to 5% but it is a liquidity pool that offers tight bid/ask spreads, as tight as any market, and our order book is one of the deepest in the bitcoin world,” Cascarilla said.
The former Goldman Sachs and Bank of America analyst continued, discussing itBit’s financial information exchange (FIX) API and web API, which he argued allow it to appeal to both financial and more tech-savvy players.
“This is all technology that we’ve created and processes that we’ve put into place that have been honed over the past 16 months, so that we’ve been in a position to be a reliable counterparty to people who want to trade,” he explained.
Cascarilla boasted that itBit is capable of handling volume that is “orders of magnitude” beyond its current trading levels.
California controversy
Though itBit has been confident in conveying its ability to operate in 50 US states, not every regulator has agreed with its interpretation of its mandate to serve consumers.
California’s Department of Business Oversight, for example, which is still debating its own licensing regime for bitcoin businesses, has suggested it is investigating itBit’s claims.
Still, Cascarilla argued that itBit’s conclusion represents the opinion of tenured counsel, including former FDIC general counsel Michael Krimminger. As part of its recent funding announcement, itBit also announced an all-star cast of additions to its advisory including former Federal Deposit Insurance Corporation (FDIC) chairperson Sheila Bair and former New Jersey Senator Bill Bradley.
“I think we’re confident that as a New York exchange trust, not operating as a money transmitter, we’re appropriately and able to operate in all 50 US states,” he stated.
Cascarilla further indicated that obtaining a trust is “not a new way of operating an exchange”, noting how Intercontinental Exchange (ICE), one of the world’s largest exchanges, operates ICE US Trust, a New York-based trust company.
“This is not a novel interpretation of how trust operates in the exchange world, it’s an extremely time-honored one and one that is now being utilized,” he stressed.
Straight and narrow
Though the timining of the launch may have come before the final BitLicense, Cascarilla suggested that itBit was not intending to cut corners with the launch.
“This isn’t something that we did because it was going to be faster, this is probably a slower route. This is certainly a more time-consuming route than going through a money a transmitter licensing or a BitLicense process,” he said. “But, I didn’t think itBit could operate in the US without going this way.”
Going forward, itBit will continue to use its Singapore operations to serve international customers while its US customers will go through its New York trust. Both operations will share liquidity.
This, Cascarilla suggested, was the long-term goal set in motion by itBit last year, one that is now being actualized but that will give way to a more nuanced long-term strategy.
He concluded:
“We certainly have other projects that are in our sights in terms of how we want to expand the exchange over time and continue to offer new fresh products for our customers that allow them to interact in the world of bitcoin and to do it in a way that is safe and sound.”
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