"As is typical of most bitcoin/fiat intermediaries when promoting their products, the new exchange is being touted as a first and a means to bring legitimacy to Bitcoin." - Qntra. We've heard that story many times before. Kraken makes similar claims. (Kraken uses the same address, 548 Market St, SF, as Coinbase. It's a mail-forwarding service. Few people know where either exchange really is.)
So what is this "licensed" thing? "Licensed" by whom? The US SEC? The State of New York? Some other state? FinCen.
There have been many exchanges registered with FinCen, the anti-money-laundering regulator, including Mt. Gox. That provides no investor protection. A few have been licensed as state money transmitters. That may provide some investor protection. Nobody as yet has been licensed as a broker, dealer, or exchange with the Securities and Exchange Commission, something every stockbroker and dealer in the US has to do.
Being licensed as a broker/dealer means SIPC insurance for investors up to $500K per customer, FINRA supervision (they fine a few brokers every month), outside audits, exams for personnel (even the people in a call center have to pass an exam, so they know what they can and can't do) and exams top management (yes, even top management at a brokerage has to pass an exam).
There are significant advantages for being a real broker/dealer. You can plug into the financial system at a higher level, and moving money around becomes much easier.
An existing broker/dealer could set up a market in Bitcoin if they wanted to. So far, no one has bothered.
When a Bitcoin exchange gets licensed by the SEC, let us know. Until then, it's just hype.
Edit: the article says they claim to be licensed in California. Here's the list of money transmitters licensed in California: http://www.dbo.ca.gov/Licensees/money_transmitters/money_tra...
Not seeing Coinbase on the list. Silicon Valley names on the list include Google, Square, AirBnb, Xoom, Paypal, Intuit, etc. No Coinbase, or anything in SF that looks like it might be them.
The Winklevoss Bitcoin Trust is not an exchange, it's an Exchange Traded Fund. Basically you can think of it as a shell company that exists solely to possess (approximately) 0.2 BTC per share; buying into it is _approximately_ equivalent to buying BTC (less the trust's expenses). It's no different in theory from precious-metal ETFs like GLD or PPLT, although I'd expect expenses to be lower since no precious metals need to actually be stored.
The operation of a trust like this is simplified by the fact that the Trust itself never buys bitcoins, and sells bitcoins only as necessary to pay the Trust's expenses. The day-to-day arbitrage that causes the price to track that of actual bitcoins is something that third parties do; they can exchange a certain number of bitcoins for a certain number of shares (and vice versa).
Anyway, it's a lot easier to run a trust like this than an actual exchange; you don't need to track lots of tiny transactions, allow every random person on the internet to open accounts, generate 1099-B forms, hold significant US dollar deposits, etc.
Heck, it doesn't even need a hot wallet; in that prospectus, exchanges of BTC for shares take three business days for settlement, which is more than enough time for a quorum of people to get their keys out of their respective bank safe deposit boxes around the country and sign a multi-signature settlement transaction offline.
The big advantage of this trust, though, is that once it is listed on a big stock exchange, you'll be able to go to any stock broker and buy an interest in bitcoin. Your accountant will be able to deal with the tax implications easily, since it's just a stock, and you'll even be able to do margin transactions through properly licensed and insured brokers. It'll take a lot of the infrastructure risk out of a bitcoin investment (although volatility risk will of course remain in full force).
I don't know the specifics, but this being a U.S. exchange, it needs to comply with a whole lot of regulations in order to deal with customer money. So, while I am not sure what exact level of protection it offers, whatever it is, it is higher than non US based exchanges, which should be a positive step for development of bitcoin
"whatever it is, it is higher than non US based exchanges".
Riiight, because nowhere except the US imposes financial regulations. Hey remember that time Europe existed?
What sets Coinbase apart right now is not what country they happen to be in, it's that they've sought extra levels of conformity with their local authorities. If Bitstamp were to register with the British Financial Conduct Authority for example, people would have a lot more confidence.
Lets not be so arrogant to imply that bitcoins future rests on the US market.
"Lets not be so arrogant to imply that bitcoins future rests on the US market" - first of all I never said this. Have you actually read what I said? I said this development is a net positive for bitcoin. Why? Because if you run afoul of US regulations, it's hard to deal with any banks that do business in the US.
IIRC it's possible to get a money transmitter "sublicense" (not sure if that's the right term) from another licensed money transmitter, which is perhaps what Coinbase is doing.
To the best of my knowledge, it's not. Instead they've hired Thomas P. Brown at Paul Hastings LLP/UC Berkeley as well as the former DFI Commissioner, Bill Haraf, to lobby on their behalf for forgiveness while they perpetually violate the California Money Transmission Act. Both have done quite well. Brown met with Robert Venchiarutti at DBO on October 25, 2013 at the very least, and also filed documents with the CA Office of Administrative Law, which he revoked when the DBO promised to be nice to him over the phone.
For his part, Venchiarutti got his current job with the then-DFI 12 days after settling a legal malpractice claim in Los Angeles, which he lied about under oath in 2010. In the same deposition where he lied about having been sued, he also admitted to having no qualifications at all for his work.
This is the guy responsible for letting money disappear at Mt. Gox (via Dwolla, with a San Francisco office) and most recently Xoom, where $31 million vanished overnight. But don't worry, his assistant Julio Prada literally has a blood pressure cuff in his office for when he gets too stressed and angry. (We know this because a former DFI employee sued them both.)
SIPC doesn't insure all types of investments, I'm not sure if BTC would qualify. And if it doesn't qualify cash intended to purchase BTC probably wouldn't be insured either.
It was decided in the Shavers case that Bitcoin is a "security" or "investment contract" for regulatory purposes. The SIPC insures securities, including investment contracts, and cash you have with a US regulated broker, up to their limits of $500K securities/$250K cash. They don't do commodities. The SIPC successfully unwound Lehman Brothers, Madoff, and MF Global, and everybody got their money back up to the SIPC limits. Dealing with a failed Bitcoin exchange would be a small job.
The SIPC is good at finding and getting back assets that somehow wandered off. See "http://www.madofftrustee.com/". Some insiders who thought they'd gotten away with big gains from Madoff funds had them "clawed back" by the litigation trustee. Billions of dollars were clawed back.
Madoff himself is Federal Prisoner #61727-054, in a cell at Butner Federal Correctional Institution, scheduled for release in 2139. That's what should be happening to heads of Bitcoin exchanges where the assets just "disappeared".
Why is this being billed as the "first U.S. Bitcoin exchange"? No doubt Coinbase will do a good job but it isn't the first or even the first regulated exchange based in the US. CampBX, Kraken, and Coinsetter are all based in the US and follow regulations.
If there actually is some distinction between what Coinbase is doing here and what the existing exchanges have been doing for some time I'd be interested to know what that is.
You're right in that it's not the "first US Bitcoin exchange". However, it is the first US bitcoin exchange with some amount of money transmitter licenses (none of the companies you listed have them to my knowledge). If you're not familiar with money transmitter licenses, it's what you need from most state regulators to move or hold money for customers in that state. That's why we can't support all states at launch. You can see a list of the states we support here: https://support.coinbase.com/customer/portal/articles/178054...
There hasn't been a US based exchange which has had meaningful volume in comparison to the larger international exchanges, so our hope is this gives people a US option that is both stable (both on regulation and security) and has reasonable liquidity.
>However, it is the first US bitcoin exchange with some amount of money transmitter licenses
Not true. There are definitely exchanges out there that have state MSB licenses. Perhaps you're unaware of their existence. I know companies can sometimes be secretive about this stuff, but exchanges like CoinX have MSB state licenses. Check out http://coinx.com/money-transmitter-licenses for instance.
VP CoinX here: We do have an exchange, www.coinxtrader.com (it is mentioned on our main website, coinx.com). We were the very first exchange to obtain MTLs, that is the route we took when we established our company.
With respect to the second point, "real-product" We have a working exchange in addition to money-transfer services in the shape of coinhub.com (which goes live in a few weeks time).
"Password must be at least 8 characters and must include at least one upper case letter, one lower case letter, and one numeric digit"
even though my password meets the requirements.
Also, something seems off. There has to be a reason that you guys aren't used that isn't being acknowledged. I have never heard of anyone using your platform, ever, and when I search for images of the trading interface all I can find are stock photos of lame graphics. Seriously, what's up? There has to be a reason, right?
Coinbase and Winklevoss ETF are acting more like new commodity exchanges than currency exchanges. A commodity (like Gold) has value attached but it is not a currency, and its value invariably fluctuates (like Bitcoin).
To date, crypto currency remains a technology topic. If you want to change finance, first understand it. Take your corporate finance, capital market, macro economics classes, and understand government's role in currency and economy. Learn about the history of how commercial banking, investment banking, currency and payment worlds have evolved over the last 100 years.
In short, figure out how bank and capital flows work before prescribing any solutions like Bitcoin, otherwise it will just prove the rightful criticism - that crypto may point to the right problem, but it in itself is just a technology looking for a problem to solve, and that even if it eventually finds its purpose, the chance that the problem will be small or a better, simpler solution comes by remains high.
Financial system as it's built today is an equally sophisticated system vis-a-vis the digital world. Most of those system designers (from say Banking Act of 1933) have left this world. Tech-hackers are many, finance-hackers are fewer. Even fewer understands both. This is why if you ask the view on crypto, you will have very conflicting views between the tech and the finance worlds. And rest to be sured, we are dealing with a problem that's more finance (including financial regulatory) than tech.
Almost anyone on hacker news understands how a full stack software system works. But do you understand how a financial "full stack" works? If you're interested in tackling the problem in a new way, we are hiring and welcome your input.
FWIW aarondu appears to have posted an identical comment on three different bitcoin related hn threads.. and is associated with http://boomerangwallet.com. Not sure why this info not on his/her profile page.
"If you want to change finance, first understand it."
You should take your own advice.
"just a technology looking for a problem to solve"
haha thanks for the Monday morning laugh.
I'd give you a clue but you took, "corporate finance, capital market, macro economics classes, and understand government's role in currency and economy." at a US school.
You should ask yourself why, knowing it all, you don't have it all...
Does this exchange offer insurance against catastrophic insolvency?
Someone went from millionaire to poor overnight when Mt. Gox failed, so it's a real concern. No one should keep their coins in any wallet except their own, and they need to make sure they have the technical understanding of how to properly manage their wallet. If your personal wallet isn't encrypted and backed up, it's not managed properly.
If you want to store coins on someone's exchange or webwallet, never store more than 25% of what you're comfortable with losing. (It turns out that "what you're comfortable with losing" is way, way more than the reality of waking up one day and realizing you've lost it all.)
This is an interesting move, but I'm worried that these new exchanges will increase the attack surface of Bitcoin's reputation. If the new ones fail, it will shake the public's confidence in Bitcoin yet again. Not that that matters, since Bitcoin seems to go along fine whether or not people are confident in it.
I don't know whether it would even be possible to insure against losing all cold storage reserves, but nobody should trust large sums to any webwallet (including Coinbase's current website, BTC-e, Bitstamp, etc) until protection against that worst-case scenario is in place.
EDIT: From the paywalled article:
The exchange could bring needed legitimacy to the currency, which isn’t backed by a central government and is traded over virtual exchanges, primarily overseas. Coinbase said it has insurance, offering traders some assurance that their money won’t disappear.
Until details about this insurance are released, do not trust large sums to Coinbase or anyone else. And unless the insurance protects against every coin disappearing tomorrow, never trust them at all. Trusting them is equivalent to gambling your savings for no benefit.
The way Coinbase words it, they may be only insuring 3% of your funds. The online wallet is insured[1], but there may only be 3% online[2] meaning a malicious employee or just a mistake leading to their cold wallet being lost probably isn't protected.
"No one should keep their coins in any wallet except their own"
That's just not going to fly if Bitcoin becomes mainstream. There's too much dogmatism around this in the Bitcoin community. Sometimes a hosted wallet is the right solution for a particular user.
It's not about whether it's going to fly. It's certifiably insane to trust your coins to any third party unless you either have multisig control to prevent those coins from leaving, or they have insurance to replace your coins. Do not ever trust anyone, or you'll lose your money like I did. They won't replace it unless they're legally obligated to replace it (insurance) or they're technically incapable of losing it (multisig).
Anything else is magical thinking at its most dangerous, since it can ruin lives.
This is a religious view speaking. More bitcoin has probably been lost due to people thinking they should handle it themselves, and doing it wrong, than has been lost to all the big hacks including Mt. Gox. A survey from a while ago reflects this likeliness: http://www.reddit.com/r/Bitcoin/comments/2bjefu/results_of_a...
I didn't say everyone should manage their own bitcoin. I said people should manage it themselves if they have the technical ability to do so. For everyone else, stick with banks. If you're borderline unsure whether you can store your coins in an encrypted wallet and make regular backups and not lose those backups, then keep your money in an FDIC-insured bank.
But sticking your coins into a webwallet like Coinbase without multisig control is a recipe for unmitigated personal disaster. A mental exercise is useful: "I've lost all my money." How would that affect your life?
I strongly disagree with anyone who would push the view that it's okay to sweep the issues under the rug in the name of making Bitcoin more popular. Putting people's fortunes at risk is almost equivalent to putting their lives at risk, because your quality of life is directly proportional to your fortune.
If Bitcoin sounds risky, that's because it is. No amount of regulated exchanges will change that. What will change it is giving consumers multisig control over their coins, or insuring against a total loss of all coins including cold storage.
There's literally no other option. One of those two things must happen, or you must not use the services. Or if you do use them, don't put in more than a quarter of what you're comfortable with losing. If that's $100, then never deposit more than $25 in BTC.
Remember, Bitstamp just lost $5 million USD to hackers, or half their most recent investment round. It's unknown whether they're currently insolvent. Everyone thinks they might have enough money to cover the losses, but nobody knows for sure. They could currently be a fractional reserve.
So Mt. Gox wasn't a one-off. Nobody is safe from hackers, technical issues, or even rogue employees that want to become millionaires. Due to the untraceable nature of Bitcoin, all exchanges and webwallets are extremely attractive targets.
The problem is that people who think they have the technical ability to do it right is astronomically higher than reality, not because people overestimate themselves, but because they underestimate the difficulty of "rolling your own bitcoin storage." I mean, you can make these arguments, but the history proves that so far centralized storage has been safer than self storage, on average.
Further, Coinbase does give users access to their private keys with the multisig vault, so one of your two criteria has already been met.
Are most Coinbase users using multisig? Since it's not the default, I'm pretty sure the answer is no. So unless multisig is the default at their new exchange, all of those people are at risk. Few are helped by multisig if few people use it.
Since Coinbase has a large cold storage reserve, and since multisig-protected coins can't be put into cold storage, the answer is pretty clear: Coinbase protects few people.
It's a false dichotomy that coins must be stored in a personal wallet that users mess up, or a webwallet that exchanges mess up. There's a third option: Convert those coins back into USD and stick it in a bank. As long as you're storing less than $500,000, you're guaranteed to have it.
Anything else is pure greed. As someone who has been burned by greed, my misfortune stands as a warning to others: please don't make my mistakes.
The reason I lost coins is because I was tempted by Mt. Gox. Their 2FA auth made it seem very unlikely that my coins could go anywhere, just like Coinbase. If I'd researched Mt. Gox, I would have discovered a history of technical problems. Yet if you research Coinbase right now, you'll discover they've had a history of those too. There have been at least two or three high-profile Coinbase incidents over the years which were featured on HN. And if you research Bitstamp, you'll see they just lost $5 million.
The common denominator is that exchanges and webwallets aren't trustworthy.
Bitcoin arguably cannot become mainstream without secure hosted wallets. Most people won't use Bitcoins until wallets start looking like debit cards, with authenticated access, insurance, and so on. Even so, prudent investors will keep large balances in offline wallets, securely encrypted and backed up.
In my experience, it's simplest to use multiple offline wallets, each in its own VM. To start using a wallet, one merely copies its VM to an online host, and appropriately configures network access for the VM.
Trezor uses BIP-32 hierarchical deterministic wallets, BIP-39 mnemonic seeds, an open communication protocol, and entirely open source software and hardware (firmware and schematics, no PCB). If you have concerns about the RNG you can import BIP-32/39 wallets from elsewhere. It also now supports multisig.
I'm not really sure what storing entire VMs as "wallets" gets you. VMs don't protect the guest VM from a compromised host OS, so at best you're protecting the host (and therefore other guests) from a compromised wallet VM. But then why not spin up a fresh VM and type in the wallet's mnemonic seed? I suppose you could argue it protects against unsophisticated attacks like malware on the host OS looking for "wallet.dat", but that's about it.
With hardware wallets, assuming the firmware is bug-free (which is difficult, but easier on a simple embedded device than a PC running millions of lines of code), you could plug it into the most malware infested machine imaginable and still securely send your bitcoins to the intended address (excluding DOS attacks, and assuming you verify the address out of band)
There are a couple ways to use a hardware wallet to manage funds. You could use a single wallet with a single seed and multiple addresses, but if the host AND device are compromised you'd lose all the funds, so ideally you'd split offline funds across a bunch of seeds that are either stored in individual Trezors, or on paper to be entered into a Trezor when they need to be transferred.
Multisig adds another strong layer of protection, and would be wise especially in organizations where you don't want to trust funds to individuals.
I'm committed to freedom and requisite privacy. Bitcoins interest me primarily because they can (with some effort) be used anonymously. I advocate the compartmentalization of activity among multiple online identities. Each identity has dedicated VMs, and each VM reaches the Internet through some nested chain of VPNs, JonDonym and Tor. Consequently, Bitcoins end up in multiple VMs. Some VMs are associated with particular identities. Others are as anonymous as fresh Whonix instances can make them. I could transfer wallet credentials between VMs, but that would take about as much time as moving VMs around.
Anyway, that's what using VMs as wallet holders gets me.
My host machines all run Linux with dm-crypt/LUKS, and I have good physical security. If I were on the road, I'd buy a notebook for cash from some random shop, and boot Tails.
If I had to, I could operate without local storage, using information that I had encrypted and archived online. But a Trezor, even fresh and charged with recovered wallet credentials, could be found and taken.
TradeHill (shut down twice due to regulatory issues, now dead) was the first US exchange, but I think that Coinbase will be the first to be properly licensed in the states it operates in, as opposed to just FinCEN.
So what is this "licensed" thing? "Licensed" by whom? The US SEC? The State of New York? Some other state? FinCen.
There have been many exchanges registered with FinCen, the anti-money-laundering regulator, including Mt. Gox. That provides no investor protection. A few have been licensed as state money transmitters. That may provide some investor protection. Nobody as yet has been licensed as a broker, dealer, or exchange with the Securities and Exchange Commission, something every stockbroker and dealer in the US has to do.
Being licensed as a broker/dealer means SIPC insurance for investors up to $500K per customer, FINRA supervision (they fine a few brokers every month), outside audits, exams for personnel (even the people in a call center have to pass an exam, so they know what they can and can't do) and exams top management (yes, even top management at a brokerage has to pass an exam).
There are significant advantages for being a real broker/dealer. You can plug into the financial system at a higher level, and moving money around becomes much easier.
An existing broker/dealer could set up a market in Bitcoin if they wanted to. So far, no one has bothered.
When a Bitcoin exchange gets licensed by the SEC, let us know. Until then, it's just hype.
Edit: the article says they claim to be licensed in California. Here's the list of money transmitters licensed in California: http://www.dbo.ca.gov/Licensees/money_transmitters/money_tra... Not seeing Coinbase on the list. Silicon Valley names on the list include Google, Square, AirBnb, Xoom, Paypal, Intuit, etc. No Coinbase, or anything in SF that looks like it might be them.