Bitcoin's first era is over

We first called it a civil war.

Following the New York Department of Financial Service's bitcoin hearings, a rift seemed to develop between those who believed bitcoin could not go mainstream without further regulation, and those who appeared to be clinging to the cryptocurrency's anarcho-libertarian roots.

But the issue has now basically been settled by the spectacular implosion of MtGox: The above-board faction has won, diluting the freedom-fighter's ideology and pushing their activities to the margins.

"I think the technology has a smaller, more outlier future if it's only going to be a wild west," said James Barcia, the spokesman for the NYC Bitcoin Center, whose founders maintain connections to small-government evangelists like US Rep Steve Stockman (R-Tex.).

Stockman was the first incumbent in Washington to accept bitcoin for his campaign. In an emailed statement yesterday responding to a senator's call to ban bitcoin, Stockman said, "Rather than thwart innovation Congress should help resolve challenges." He has not yet responded for further comment.

The Federal Reserve itself has said it cannot regulate bitcoin, and instead appears to be observing it with interest. In comments made yesterday, Fed Chair Janet Yellen seemed to echo Stockman's sentiments.

"The Fed doesn't have authority with respect to bitcoin," she said. "But certainly it would be appropriate for Congress to ask questions about what the right legal structure would be for digital currencies."

The professionalization of bitcoin has already begun. SecondMarket has announced it plans to start the first US-based exchange network. Fortress Investment Group just made the first-ever public filing of bitcoin holdings.

"Mt. Gox's closure marks the end of bitcoin's first wave of entrepreneurs and at the same time underscores just how far the bitcoin ecosystem has come," Tyler Winklevoss wrote. He links to a TechCrunch article proclaiming the fall of Gox to be the end of the first wave of bitcoin investment.

Some are still clinging to the notion that bitcoin will suffer from further regulation. In a note on his blog, Union Square Ventures' Fred Wilson said that it was actually too much regulation that caused MtGox's problems.

"Bitcoin is already regulated in the US and it is becoming more regulated every day. And the regulatory environment in the US has dampened the amount of innovation around bitcoin that has developed here in the US. All the major bitcoin exchanges have been built outside of the US and a significant amount of the venture capital investment in the bitcoin ecosystem is happening outside of the US. This is a direct response to the stricter regulatory oversight and requirements here in the US versus other countries."

While not necessarily sharing Wilson's ideological implications, Chicago Ventures exec Ezra Galston believes there is some truth to the idea that a jumbled regulatory environment may have contributed to Gox's collapse. He draws an analogy to what happened to the online poker industry.

"As poker became more popular, banks became less comfortable with how much they were holding," he told us. "That forced poker sites downstream into black market banks, which increased the risk of collapse."

He continued:

"What typically happens is companies don't want to shut down, so they move down-market, waiting for the day where becomes easier to go mainstream. The near term risk is [thus] in consumer deposits."

It's clear that a rump customer base will continue to use bitcoin for illicit activity. There seem to be at least two dozen online "dark" marketplaces where drugs and the like can be purchased, and bitcoin seems to be the preferred currency for some. Some argue it also retains a potential as a tax haven.

We've gone over what bitcoin needs to do next for the mainstream branch to take off: fix its wallets problem, and bring in regulators to provide customer protections.

The bitcoin community, and regulators, seems fully committed to doing so.

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