‘The sooner Mt. Gox goes away, the better for Bitcoin’

February 28

SecondMarket CEO Barry Silbert (Fortune Live Media)

Even as the disgraced Bitcoin exchange Mt. Gox filed for bankruptcy Friday, another is standing up — and soon it'll allow investors to buy and sell the virtual currency in the United States. New York-based SecondMarket is spinning off its Bitcoin-based businesses into a new venture. In an interview, CEO Barry Silbert explains why the trust isn't going to be like Mt. Gox and how it'll affect ordinary investors like you and me. A lightly edited transcript follows.

Brian Fung: Let's start with Mt. Gox. What does its collapse mean for Bitcoin more generally?

Barry Silbert: The sooner that Mt. Gox goes away, the better for Bitcoin. And if you look at the short history of Bitcoin, there's been a series of bubbles and busts, there's been a series of disruptions, there have been hacks, there have been thefts. And really, after every single event, Bitcoin has emerged stronger, and the companies and players involved — I think certainly the profile of the players involved — has continued to increase.

From the way Bitcoin entrepreneurs are responding, it seems like the community resembles open-source software projects in that it's kind of self-correcting.

My background is from Wall Street. As I've come to appreciate the hard work that's being done behind the scenes at the protocol level, I really have been very impressed at the speed at which the community comes together, rallies support, fixes issues, addresses PR crises like this one. And I think it demonstrates that you have a number of companies and entrepreneurs and folks involved, who, even if they're competitive with one another, are happy to work for the greater good of Bitcoin.

You said the sooner Mt. Gox goes away, the better for Bitcoin. What's the underlying logic there?

Mt. Gox, from a reputation perspective, has not kept up with the responsibility that it had as a leading exchange. It did not invest sufficiently in technology, in resources, in customer service, in PR, and, for a period of time, it looks as if the price on Mt. Gox may not have been representative of the true market for Bitcoin — and, from that perspective, that creates confusion and noise in the marketplace. If the leaked document is true, eliminating a bad actor, a poorly run business, from the ecosystem is a good thing for Bitcoin.

Second Market has its hands in a lot of different pots. What's with the interest in Bitcoin?

SecondMarket, in its current structure, has three businesses. We have what we call our platform business, which I'll come back to, we have our Bitcoin investment trust business, and then we have our trading business.

The platform business is a software platform that private companies and private funds use to more efficiently raise capital from a broad group of investors as well as facilitate liquidity for their stakeholders. So that platform business is a fast software product that's sold to private issuers.

Separately from that, we have our Bitcoin Investment Trust businesses, which is really an asset management business because the BIT is an investment vehicle that enables institutional high net worth investors to invest in Bitcoin in a safe, secure way. The Bitcoin Investment Trust now has 82,000 bitcoins in the trust, which at today's prices is about $40-50 million. That fund is the first of what may be a series of vehicles focusing on the digital currency space.

And then the third business we have is a trading business. Now that trading business ... going forward is focusing most of its energy on Bitcoin market-making.

We are spinning the Bitcoin Investment Trust and the trading business into a new company. That new company solely focuses on Bitcoin opportunities. We are going to contribute from Second Market at least $20 million of cash and Bitcoin assets into that new entity. So what that means is that on day one, that new company will be well-capitalized.

We've begun to put together a Bitcoin exchange in close collaboration with a number of global banks, Bitcoin companies and regulators. And this exchange we're setting up, we're looking to model, is not like the existing Bitcoin marketplaces but more akin to the exchange model that Wall Street is really more accustomed to. As an example, the New York Stock Exchange, ICE down in Atlanta, and the way that those exchanges are structured is that they are comprised of a group of member firms, and those member firms are all regulated. So to participate on the exchange you need to be a bank, a [money services business], a regulated broker-dealer, or a Bitcoin company, and that exchange will also be creating a clearing business, so all the transactions that happen on the exchange will be centrally cleared through this central entity. On top of that exchange is also going to be what's called an SRO, or a self-regulatory organization, whose job it is to provide governance and oversight of the exchange members and exchange activities. That SRO will work closely with federal and state regulators.

What makes this exchange different from Mt. Gox?

The analogue would be the New York Stock Exchange. If you want to go buy Twitter stock, you don't go to the NYSE, you have an account at Fidelity or Ameritrade, and this is the exact same construct. The founding members of the exchange — which are going to be these banks and Bitcoin companies, and will likely include other Bitcoin exchanges — they are absolutely eligible and encouraged to become members of the exchange, as well as wallets like Coinbase and Circle.

As an individual buyer and seller of Bitcoin, you will go through one of those channels like you're currently doing, but what this infrastructure provides is a central, price-setting mechanism and clearing mechanism so that the entire infrastructure of members can be connected together in a global liquidity pool. That's the only structure, we believe, in which the banking industry will participate in the Bitcoin marketplace.

Brian Fung covers technology for The Washington Post, focusing on telecom, broadband and digital politics. Before joining the Post, he was the technology correspondent for National Journal and an associate editor at the Atlantic.
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