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By MICHAEL J. CASEY and ROBIN SIDEL CONNECT
Updated Feb. 26, 2014 11:27 p.m. ET
Barry Silbert, CEO of SecondMarket, says a bitcoin exchange the firm is setting up 'looks nothing like' Mt. Gox. DPA/Zuma Press
U.S. firms are pushing ahead with plans to open bitcoin exchanges catering to professional traders, after the closing of a Tokyo-based exchange sent shock waves through the virtual-currency world.
Perseus Telecom, a provider of high-speed telecommunications lines for securities exchanges and trading firms, is joining forces with bitcoin-trading platform Atlas ATS and Strevus Inc., which produces compliance-management tools for financial institutions and other firms, to build one or more U.S.-based digital-currency exchanges in the U.S. and elsewhere.
The push is being driven by strong demand for bitcoin-trading capabilities from Perseus's clients in the high-frequency trading industry, said Perseus Chief Executive Jock Percy.
The firm has created a separate digital-currency unit and already has received $2 million in revenue commitments, the company said. High-frequency trading firms use computers to dart in and out of markets within milliseconds to profit from minuscule pricing advantages.
The travails at bitcoin exchange Mt. Gox have cast a pall over the virtual currency. Michael Casey argues this is not a death knell for virtual currencies. Photo: AP.
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The meltdown of the Mt. Gox exchange shows that "we have to put in place the right level of institutional controls and mechanisms that we're used to in the world of banking," Mr. Percy said. "That way we can build trust. [A currency] has to have trust."
The sudden closing of Mt. Gox, which once claimed to account for 80% of bitcoin trading volume, underscored the technological and regulatory risks of the five-year-old digital currency. After freezing customer withdrawals on Feb. 6 and suffering a hacking attack, Mt. Gox said it was working on a fix to restore operations. It appeared to shut down completely Tuesday when its website went dark and investors were left with little recourse to retrieve their frozen funds.
Bitcoin is a virtual, computer-driven currency that is created, or "mined," using complex mathematical algorithms. Some merchants accept bitcoins as payment for goods and services. Users also can trade the currency on exchanges or among themselves. But it isn't regulated and isn't backed by a central bank, so when problems arise there is no one to intervene.
Prices of bitcoin have soared in the past year, attracting interest from some professional traders looking to participate in the market. But the troubles of Mt. Gox have underscored the need for more oversight.
The move by Perseus comes after SecondMarket Inc., a platform for trading shares of private companies, said it is putting together an exchange in collaboration with a number of global banks and bitcoin companies. SecondMarket CEO Barry Silbert said in an interview that the model "looks nothing like" Mt. Gox. Instead, he said, it will be "more like a traditional exchange…like the New York Stock Exchange, where you have regulated investors who form the spokes of a hub" with central clearing and settlement of trades and a self-regulatory body.
The U.S. firms trying to roll out new exchanges argue that by bringing in both the Wall Street establishment and regulators, they can offer customers greater confidence in the security of their money.
Mr. Percy said many high-speed firms have expressed interest in trading bitcoin, which appeals to this sector because of its low transaction costs. Meantime, Mr. Silbert said his firm continued to be approached by banks and other financial institutions despite the continuing turmoil at Mt. Gox this past month.
But Citigroup foreign-exchange strategist Steven Englander, who was initially inspired by interest from Wall Street clients to write a series of research reports on bitcoin late last year, said interest has since waned now that a string of crises has halved the bitcoin price to less than $600 from more than $1,000 in December.
"I would say it is still on the outer fringes of the radar screen," said Mr. Englander, who also argued that more-regulated, institutional bitcoin trading could drive away the more libertarian-minded investors who were drawn to bitcoin's anonymity and exclusion from government intervention.
Regulation could be a controversial part of this process. Most U.S. states require such exchanges to get money-transmitter licenses. The exchanges hope to avoid that. SecondMarket already has a broker-dealer license, which would cover currency trading. Atlas ATS hopes to partner with firms that already have broker-dealer licenses.
It isn't clear how federal regulators will respond to those plans. State banking regulators have been scrutinizing bitcoin companies for months.
"This is by no means a death knell for bitcoin or virtual currencies, but it underscores the potential benefits of regulation," Benjamin Lawsky, superintendent of the New York Department of Financial Services, said of the Mt. Gox shutdown in an interview Tuesday. Mr. Lawsky's office is considering potential new regulations for virtual-currency companies and held two days of public hearings about the issue last month.
Write to Michael J. Casey at
michael.j.casey@wsj.com and Robin Sidel at
robin.sidel@wsj.com
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