The team behind a regulated e-money issuer has launched a bitcoin exchange called Digital Securities Exchange (DSX).
The issuer, ePayments Systems Ltd, has been an authorised electronic money institution with the UK regulator, the Financial Conduct Authority, since last July. ePayments Systems has in turn made DSX its agent.
The move is meant to position DSX to capture the market for sterling-bitcoin trading, said Mike Rymanov, who founded and leads both ventures.
"The sterling market is absolutely untouched. We have the opportunity to corner this market completely and this is our intention."
DSX, which launched in December, offers trading in bitcoin, litecoin, pounds sterling and euros. Customers can make deposits and withdrawals through SEPA or SWIFT transfers.
ePayments Systems has more than 200,000 customers and a transaction volume of $50m a month, according to Pari Andrade, the exchange's head of marketing.
Dual accounts required
Deposits to the exchange have to flow through ePayments Systems. Customers of the exchange therefore have to create accounts on both platforms.
The relationship between DSX and ePayments Systems is complicated by a third company, Electronic Payments Association Ltd. Customers funds are currently routed through the EPA, also a Rymanov company, that works in partnership with an e-money issuer in Gibraltar.
"The EPA is our distribution concept. In order to get a wallet, you have to become a member of this association," he said.
The EPA mainly serves online publishers and currency traders, who were an ideal market for a "soft launch" of the bitcoin exchange, Rymanov said. Within the next month, the EPA will be removed from the chain of transactions, allowing customers to deal directly with DSX and ePayments Systems, he added.
The same executive team runs both DSX and ePayments. Rymanov said he ran business development for Mergermarket, a financial information service that was part of the Financial Times Group when Rymanov worked there, in Central and Eastern Europe before starting ePayments.
The use of an FCA-regulated payment processor to accept deposits from customers for a bitcoin exchange is not a new manoeuvre. The longstanding but shadowy exchange BTC-e – its operators remain anonymous – accepts deposits from an FCA-regulated company called Mayzus Financial Services, for example.
However, DSX's status as a registered agent of the regulated ePayments Systems adds a new layer of scrutiny to the exchange, although it does not confer FCA-regulated status on the exchange.
Users must create accounts and offer their identity information to ePayments Systems as part of anti-money laundering rules the issuer must follow.
"Everybody who trades on DSX is subject to the same compliance procedures as the regulated entity," Rymanov said.
The fact that funds must flow through ePayments Systems before going to DSX will likely give potential customers of the exchange some reassurance, at least of their fiat funds, said Adam Vaziri, a director of consultancy Diacle, which advises on compliance and regulatory matters.
"From a customer's point of view, they see the money they're depositing is with an authorised institution and flowing to a related party," he said.
Debit card offering
Another novelty in the DSX/ePayments approach is the fact that customers can transfer funds from the exchange into a pre-paid MasterCard offered by the payment processor.
The card works like a debit card and can also be used to withdraw cash from ATMs. The spending limit on the card is $20,000 per day, while ATM withdrawals are capped at $3,000 daily, Andrade said.
She explained that funds on ePayments are insured by Lockton, an insurance brokerage headquartered in Kansas City. DSX is working to obtain insurance for funds on its platform and is in contact with underwriters in London, Andrade added.
The importance of regulation
Exchanges and bitcoin businesses in the UK have been unable to secure stable relationships with local banks.
Swedish exchange Safello, in a notice to customers days before it was force to abandon UK Faster Payments by its bank, said it had done "everything in its power" to prevent the closure of its account, but to no avail. It did not reveal who its bank was.
Last month the bitcoin hedge fund manager Global Advisors was forced to look elsewhere after its longtime bank HSBC gave notice.
In September, the London-based exchange Coinfloor ceased offering Faster Payments when its service provider Capital Treasury Services cut ties with its bitcoin clients after pressure from the banks it works with.
Rymanov is sanguine about his firm's prospects with UK banks:
"Our banking relationships will hold up. This is the reason we take the regulated approach, the banks do not bank a company that handles bitcoins, it handles an entity that is regulated."
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