Bitcoin Exchange Leaders Look to Rebuild Trust in Aftermath of Mt. Gox

Daniel Cawrey
Mar 26, 2014 at 19:11 UTC
Updated Mar 28, 2014 at 13:44 UTC

Notable names from the digital currency exchange sector took the stage at CoinSummit San Francisco on Wednesday, 26th March in a talk that included Kraken CEO Jesse Powell and BTC China CEO Bobby Lee.

The session was moderated by Pantera Capital Management’s Dan Morehead.

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The spectacular failure of Tokyo-based bitcoin exchange Mt. Gox was the inflection point for a discussion on bitcoin exchanges today at CoinSummit San Francisco.

The panel, which included Kraken CEO Jesse Powell and BTC China CEO Bobby Lee, focused on topics such as regulation, security and the path ahead for the new financial companies aiming to serve as access points for bitcoin consumers around the globe.

Problems remain

Both San Francisco-based Kraken and Beijing-based BTC China have been at the forefront of the effort to increase transparency in the bitcoin exchange sector following the bankruptcy of Mt. Gox, but the companies’ top execs acknowledged more still needs to be done.

For example, Kraken recently released a proof-of-reserve audit that it told CoinDesk will be the first of more comprehensive assessments, while BTC China has openly talked about its banking issues in China.

It’s this focus that has, in part, helped them grow into successful digital currency exchanges.

BTC China’s Lee says that rival Chinese exchanges are engaging in misdirection, which in turn is confusing investors.

Explained Lee:

“All exchanges in China are engaging in deceptive marketing practices, fake volume, fake liquidity.”

Phantom orders and flash crashes are big problems in China, said Lee:

“Part of it has to do with culture. They think that it’s okay to do it if everyone else is. You just pad your bitcoins by 10,000, 20,000 BTC per day.”

Kraken’s Jesse Powell pointed out that Mt. Gox may make all the headlines, but there have been persistent problems outside of that particular company. “Many other exchanges have failed recently,” he said.

Powell advocated for an independent resource where investors can get unbiased information about exchanges, saying:

“I think that there needs to be a good resource out there, like a Consumer Reports or a Bitcoin Better Business Bureau.”

Regulatory pathways

Kraken just yesterday announced a $5m funding round, one that it plans to use to reinforce security and comply with US regulatory requirements.

Kraken’s Powell addressed this need during the discussion, as well:

“The cost of security alone is huge. Screwing it up is expensive, too.”

He added: “The US has been difficult. In the EU, you need one license. In the US, you need 48 state licenses.”

Bobby Lee said that with the lack of regulation and transparency, no one really can tabulate the total losses that have happened. At least not yet.

Said Lee:

“Since Mt. Gox, there have been a lot of crashes. A lot of people got hurt. The question is: Did the exchange experience a loss as well? These are the pitfalls of an unregulated industry.”

Powell believes that the concept of the distributed exchange could emerge as a result.

“The ultimate way is some distributed exchange that nobody controls. I think that’s what the future is,” said Powell. “How you are going to regulate those guys I have no idea.”

New services

(L-R) Powell, Lee, (L-R) Powell, Lee, Morehead

Distributed exchanges are one idea that may arise as a result of regulatory opacity. But right now, existing exchanges are going to mature and add new services in order to serve investors accustomed to traditional securities.

Margin trading, leverage trading or credit lines are options, said Lee.

“Customers want that, they want the leverage. So I think it’s an inevitable trend.”

Powell said that for Kraken, margin trading is “something we plan on offering soon. [But] we want to do it right.”

Another concept both CEOs talked about was the idea of localized exchanges in particular markets that can use an ECN-type system to provide liquidity from larger exchanges.

Local exchanges, they said, are important to adoption because those types of companies will be more familiar with particular markets.

Concluded Lee:

“I do see a world with dozens or hundreds of exchanges with the liquidity being pooled. I do see that happening. I think that’s my prediction over the next few years.”

 

Image by CoinDesk