Do the people running Mt. Gox trade on their own exchange?

It's striking how different the trading pattern was when Mt. Gox was offline. Tradehill settled down around 15, got some market depth, and Bitcoins started acting like a stable currency. Once Mt. Gox came back up, the volatility went way up. That's backwards. A bigger exchange should be less volatile.

Something funny may be going on behind the scenes here.

Watch for limit orders not being executed when they should be, or delays before trade execution. That's an indication of front-running.

[will be subject to a registration requirement]

It may be time to report Mt. Gox to the Japan Financial Services Agency, which regulates money transfer firms in Japan.

Japan's Financial Services Agency regulates money transfer firms which operate in Japan.  For example, SBI Remit is a registered money transfer firm. They transfer to and from various currencies and can move money around the world. They even support mobile phones.  Mt. Gox comes squarely under the same regulations they do.

Here's are some excerpts from the regulations:

"Only banks licensed under the Banking Act of Japan (Act No. 59 of 1981, as amended) and certain other financial institutions handling deposits licensed under other applicable laws (collectively, the Banks) are permitted to engage in ‘money remittance transactions’....

"However due to the innovation of information-communication technology, persons/entities other than Banks can easily conduct services that are similar to the traditional fund transfer business conducted by Banks. This, therefore, means that the line between permitted and prohibited services is blurred and it has been argued that, by considering customer protection, it is necessary to sort this issue out and set new regulations on fund transfer services by permitting certain entities other than the Banks to engage in the business of such services.

"The PSA will allow companies that are not licensed Banks to engage in the business of ‘money remittance transactions’ in Japan provided that: (i) they are registered as ‘fund transfer business operators’ (operators); and (ii) they are able to engage in services to the extent that such transactions fall under the category of a ‘certain small amount of transactions’. Details of the ‘certain small amount’ mentioned in (ii) above will be provided for in the cabinet order. However, in light of discussions at the National Diet of Japan, such amount is expected to be between JPY500,000 and JPY1,000,000 or less."

"An entity which intends to be an operator will be subject to a registration requirement and certain regulations including the security of its assets and other customer protection measures, supervision and measures against money laundering."

"In order to be registered as an operator under the PSA, an applicant must satisfy certain requirements, such as the applicant must be a stock company (kabushiki kaisha) or a foreign entity which has the equivalent registration in its home country and has an office(s) and representative in Japan; the applicant must have sufficient financial standing to conduct business appropriately and properly; the applicant must have a satisfactory organisational structure to conduct business appropriately and properly; and the applicant must have a compliance system to ensure observance with the relevant laws and regulations. "

"The PSA will impose an obligation on an operator to secure the assets in amounts equal to or more than the total amount of: (i) funds which an operator is transmitting; and (ii) procedural costs in relation to reimbursement of such funds as set out in (i), so that the transferred funds can reach the recipient even in the event of an operator’s insolvency."

"In the event of an operator’s insolvency, users have rights to recover their assets from the above secured assets in priority to an operator's general creditors, pursuant to the procedures provided in the PSA."

There's more, but you get the general idea.

The Japan Financial Services Agency enforces these regulations.

    Financial Services Agency
    The Central Common Government Offices No. 7,
    3-2-1 Kasumigaseki, Chiyoda-ku, Tokyo, 100-8967 Japan
 

I'm John Nagle, the person behind Downside. Over the last decade, we predicted, well in advance, the dot-com crash (company by company), the oil spike, and the mortgage crisis. We've also explored some financial scams - Enron, Madoff, and their ilk. Downside was written up in Business Week, CNN, Fortune, etc. Our track record speaks for itself.

I've been looking at the Bitcoin world. It's amusing watching the classic forms of financial trouble happen in miniature. I have no financial position in Bitcoins, so I'm looking at this neutrally.

So what's wrong in the Bitcoin world?

First, it looks like a bubble. Here's Bitcoin before the Mt. Gox debacle:



That just screams "bubble" to anyone who's seen one. Bear in mind that the Bitcoin system generates no revenue. All funds must come from new investors. This is not like a startup company. This is a zero-sum game. If you've been in the game for half an hour and you don't know who the patsy is, you're the patsy.

Second, Bitcoin is supposed to be a currency, but it's actually a speculative vehicle. If Bitcoin were a successful currency, there would be many merchants using it for small transactions, with perhaps some speculation on the side. In practice, the speculation dominates.  This is the real problem with Bitcoin. If it had been launched as the payment system for something like music tracks or smartphone apps, it might have worked out better.  Or not; "Digicash" and "Beenz", the two previous rounds of this idea, also tanked.

Third, the organizations in Bitcoin's ecology are very flaky. Mt. Gox is two guys in Tokyo who are in way over their heads. We don't know much about Tradehill, which is somewhere in Chile. Neither of these "exchanges" has a published business address, a Dun and Bradstreet rating, published audits, or regulation as a bank or money transfer firm. Yet they're acting as depository institutions for sizable funds belonging to others.

It's amusing watching the Bitcoin community flail around. Most of the classic financial disasters are being re-enacted in miniature. We have pyramid schemes, tulipomania, bucket shops, pump and dump... This would be fun if it were an MMORPG.

[Bitcoin today (USD, TradeHill)]

Bitcoin today (USD, TradeHill)

We're getting past the drama phase. That's what a useful currency is supposed to look like - flat and boring. When the chart looks like that, merchants can price products in Bitcoins. Merchants typically deposit their day's receipts in a bank once each day. If the price of Bitcoins is steady over the course of a day, merchants can convert to a real currency once a day, pull out the cash, and put it in their bank account.

There's a reasonable amount of market depth behind that, too.  At first, trading on Tradehill was very thin, but now there's a a few thousand Bitcoins of market depth on both the bid and ask sides. That's not huge by financial standards, but it's enough to allow some modest real-world businesses to convert their daily take.

Back in the Mt. Gox era, we were seeing $30 and $8 in the same week. That had to stop.

This is real progress.