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Bitcoin entrepreneurs barrel ahead despite legal clouds

A pile of Bitcoins are shown here after Software engineer Mike Caldwell minted them in his shop on April 26, 2013 in Sandy, Utah.

On the top floor of a Soho office building in Manhattan, 27-year-old Jaron Lukasiewicz shares office space in a tech incubator with other startup entrepreneurs. But he is hoping to set himself apart. Lukasiewicz is the founder and CEO of Coinsetter.   

“Coinsetter,” he explains, “is a high performance lever trading platform for Bitcoin.”

Translation: His company offers a system for people to make Wall Street-type trades in Bitcoin. He wants the digital currency to be bought and sold like pork bellies or foreign exchange: hedged, shorted and used in derivatives.

Lukasiewicz is so confident in the cryptocurrency that, he says, “I’m about to actually start receiving some of my salary in Bitcoin.”

Lukasiewicz represents a new crop of entrepreneurs, flush with venture capital, who are moving quickly to bring Bitcoin from the fringe of commerce to the heart of the financial mainstream. These believers aren't deterred by volatile price swings or the digital currency's cloudy future under new government scrutiny.

Bitcoin began as a bank vault of hope for libertarians who admired its freedom from government control. Some also looked to it as a payment system for drug dealers and hackers. (A certain level of anonymity is possible, though it’s not absolute.) But as its value has risen, and circulation has grown to more than $1 billion, Bitcoin has attracted a new type of interest. 

A new wave of creative business models

“We’re seeing a new wave where venture capitalists are coming in, skilled entrepreneurs are coming in” says Jeff Garzik, a Bitcoin software developer who works for Bitpay. While there have been small startups entering the Bitcoin world for a few years, “this is sort of the second wave of Bitcoin startups, more serious and professional.”

These startups are enjoying significant venture capital backing. Coinsetter got a $500,000 infusion of cash, and Coinbase received $5 million. Garzik says these startups “are doing the heavy lifting necessary to build the Bitcoin economy.”

Lukasiewicz, with Coinsetter, is a former Wall Street trader who brings financial know-how to what had been the purview of tech enthusiasts. “The people who I see becoming interested in Bitcoin and bringing it to the next level is really Wall Street,” he says.

He imagines a day when Bitcoin is used “like an IP address for money” -- when people use bank cards or online payment systems that use Bitcoin almost like machinery for moving money effortlessly across currencies and oceans without the fees and cumbersome methods used today.

Lots of startups, lots of ideas

Ideas for Bitcoin-based businesses abound. Many entrepreneurs are focused on making easy-to-use exchanges for people to buy Bitcoin. Coinbase is one such example. 

Zlatko Bijelic helped start a company called Bitcoinstore, which sells more than 300,000 electronic products, from laptops to headphones, in Bitcoin online. His business model depends on the currency’s gradual appreciation. So he skips retail price mark ups.

“We’re usually $100 or $200 cheaper from Amazon on big ticket items,” he says.

The proliferation of companies trying to make Bitcoin more accessible has stimulated interest from consumers and regulators alike.

“We have spent far more than traditional startups on legal fees in order to understand our responsibilities,” says Lukasiewicz.

The rub

Federal authorities have closed some Bitcoin trading sites for not following regulations designed to prevent money laundering. The State of California recently warned a Bitcoin association it was running afoul of similar state regulations. 

“I am hoping this is a different story that’s been told many times before,” says Brad Jansen, director of the libertarian Center for Financial Privacy and Human Rights. He says previous digital currencies failed.

“There was a similar development in the early to mid 90’s... Government regulation either stifled them and put them out of business or forced them to become something they weren’t intended to be," he says.

This time, the government isn’t trying to shut down the digital currency, says Jen Shasky Calvery, director of the Financial Crimes Enforcement Network at the Treasury Department.

“We at FinCEN and Treasury support innovation, but by the same token, the financial industry has the responsibility to control for anti money laundering risk,” Shasky Calvery says. She says even small startups should be able to follow the same basic rules as, say, Western Union if the business involves transferring money.

“There are all types of money services businesses in the U.S. from big to small, mom and pop to big companies, new ones popping up every day and so in crafting those rules we’ve had to be very cognizant of not being overly burdensome and we think we’ve walked that divide pretty well."

For Jeff Garzik, the Bitcoin software developer, Bitcoin could use a little bit of regulation.

“I view it as a positive thing. It’s sort of cleaning out the swamp, we don’t want criminals and that type involved in Bitcoin," he says.

But what worries him is the fact that 48 states have 48 different sets of money laundering rules and licensing requirements -- that can add up both legally and financially. That’s where outside investors, like venture capital fund managers, can help.

“With all that venture capital, that can at least get a Bitcoin business over the regulatory hurdle," Garzik says.

Trading hasn’t choked off since the government started invoking money-laundering rules.

Bitcoin investor Joshua Seims says it’s anyone’s guess if this whole digital currency idea will catch on or die off, but for now, Bitcoin is attracting big investment.

“If it does succeed, the upside is so huge.”

Lukasiewicz illustrates that optimism. He has a small staff in a shared office now ahead of this month’s expected launch of Coinsetter’s trading system. But the corporate website speaks to his ambitions: The homepage shows a packed trading floor the size of a football field.


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About the author

Sabri Ben-Achour is a reporter for Marketplace, based in the New York City bureau. He covers Wall Street, finance, and anything New York and money related.

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