Coinbase, Gemini, and CoinX Battle to Be The First Licensed Bitcoin Exchange

When I read that Coinbase was opening a licensed Bitcoin exchange, after receiving $75 million in investment capital, it made complete sense to me.  That is the obvious next step for the company.  However, what has thrown me off is their claim to be the first “regulated” Bitcoin exchange.  This claim is confusing, for a few reasons, and they do not provide a lot of information about what they really mean by the term “regulated”.

Coinbase’ Claims Seem Misleading

As mentioned before, what does “regulated” mean?  Yes, exchanges have certain regulations they must follow, and many exchanges have not followed the required regulations, but some have.  The requirements for complying with current regulation is complicated, and requires many steps, but even after going over each step, it is difficult to see how they are the “first” to do so.

Coinbase is Not the First Bitcoin Exchange Registered as a MSB

Basically every US-based Bitcoin exchange has registered as a Money Service Business (MSB).  If they were not at least registered as such, it would be even more difficult to find banking partners.  However, being registered as a MSB does not make one compliant to current regulations, even in states that do not require specific licensing for MSBs.

Coinbase is Not the First Bitcoin Exchange to Implement KYC / AML Compliance Policies

Again, nearly every large Bitcoin exchange, and many other Bitcoin-based MSBs, have implemented Know Your Customer (KYC) and Anti-Money Laundering (AML) policies.  These policies are an absolute requirement to be in compliance with most state and federal MSB regulations, and have been a sore spot in the Bitcoin community for quite a while.  Many do not want to provide personal details to exchanges, but it is unavoidable if an exchange wants to operate within the US without breaking the law.

Still, being an MSB and implementing KYC / AML policies does not mean an exchange is truly “regulated”, as they are still missing one key piece of the puzzle.

Coinbase is Not the First Bitcoin Exchange to Obtain MTLs in Multiple US States

This final piece of the puzzle comes in the form of a Money Transmitter License (MTL).  The process of obtaining a MTL varies from state to state.  Some require no MTL at all.  Many others have very lenient requirements for obtaining the license.  However, quite a few states have extremely strict requirements to obtain a MTL, and even when a company complies with all the requirements, it can often takes months, or years, to be approved.

According to Coinbase’s website, they currently have obtained the required licensing in 15 states.  While this is an impressive feat, and does indeed show that they are following the require regulations, and laws, for the states that have issued licenses to the company, as well as states that do not require licensing, it does not make them the first.

While many exchanges are working on obtaining the proper licensing, there is one exchange that certainly launched before the Coinbase exchange, and has licensing in more states than Coinbase, or any other Bitcoin exchange: CoinX.

CoinX has been in development since 2012, and launched in December 2014.  At the moment, the company lists 37 states as 100% licensed, which means the company is either registered as a MSB (for states where a MTL is not required), or has obtained the proper licensing in the states that require it.

It seems that most people haven’t heard of CoinX, or had no idea they had launched…in fact, I only knew this because of my work with Trucoin.  Trucoin partnered with CoinX, as an authorized delegate, to provide debit/credit card purchases of bitcoins, as well as Bitcoin ATM services, which resulted in an additional partnership with Bitpay to sponsor the Bitcoin Bowl.

No matter how you slice it, Coinbase was not the first regulated US Bitcoin exchange, unless their definition of “regulated” includes something more than acquiring all the necessary licensing, and implementing the required policies, to legally operate under current US federal and state regulations.

Why Does It Matter if Coinbase Was the First Regulated Bitcoin Exchange or Not?

It really does not matter.  Coinbase’s recent investment round, that generated $75 million, is incredible.  Launching an exchange directly after that was a smart move, and has obviously been in development for quite some time.

The problem is the way it was announced.  Falsely claiming to be the first regulated Bitcoin exchange, or at least using some undefined version of the term “regulated”, was wrong.  On top of that, it seems that the company incorrectly claimed to have regulatory approval in a few states in which they are actually not licensed or approved.  Then again, these states, specifically New York and California, are in a regulatory “grey area”.  They have mentioned potential regulations on Bitcoin, or other digital currency, such as New York’s Bitlicense, but have yet to finish developing special licensing that digital currency may end up requiring.

Both California’s Department of Business Oversight and New York’s Department of Financial Services have since released statements proclaiming that Coinbase does not have regulatory approval to operate in either state.  This has prompted Tripp Levy PLLC, a “national securities and shareholder rights law firm” to launch an investigation into Coinbase, Inc. for “allegedly making false and misleading statements to prospective and current users of Coinbase’s Bitcoin Exchange regarding its business.”

Many were praising Coinbase’s move when the first announcements were made, criticizing Cameron and Tyler Winklevoss for not launching their exchange / ETF sooner, and even mentioning that,”CoinX lost this opportunity!”  However, it isn’t that simple.  In the end, Coinbase may succeed in becoming the dominant Bitcoin exchange, or they may lose out to competitors who are taking a more cautious route.  Both Gemini and CoinX seem to be using this, strategically, and that may end up being the better long-term choice.

On the next page, I will go into more detail about these two exchanges, and how they may have advantages that aren’t immediately noticeable.

As mentioned previously, the Winklevoss twins, Cameron and Tyler, have announced their own Bitcoin exchange,”Gemini“, which is advertised as a,”working with federal and state governments to launch in full compliance with all Bitcoin regulations and consumer protection laws.”  This is separate from the brothers’ proposed Exchange-Traded Fund (ETF), which will likely be based on their live project:  the Winkdex.

Also, mentioned on the previous page, is CoinX, which could be considered to truly be the “first regulated Bitcoin exchange” in the United States.  CoinX does not have the name recognition that the other exchanges have, but it certainly is the closest to obtaining licenses in every state.

Both of these exchanges are at a disadvantage, in a way, as Coinbase has built an enormous userbase since it’s creation, and many of those users will now use Coinbase’s exchange by default.  However, they also have their own unique advantages.

The Winklevoss’ Gemini Exchange

Many dub the Winklevoss’ twins projects as “vaporware”, as they have yet to produce any real product outside of the rather simple Winkdex.  This is a mistake in my opinion, as the lack of a publicly launched product does not mean that their systems have not been extensively developed.  While Coinbase has amazingly raised over $100 million in funding, it is very possible that the Winklevoss twins have access to significantly more capital than that.

Their lawsuit with Facebook supposedly resulted in $20 million cash, as well as 1.2 million shares of Facebook stock.  Shortly after that, Facebook underwent a 5-for-1 stock split, which resulted in the twins’ shares multiplying to 6 million.

It is unknown if the twins have kept all of these shares, or sold part/all of them.  Even if they sold every share at the lowest price that Facebook stock price dipped since it’s public launch, which was $18.06 in August of 2012, the two would have walked away with ~$108,000,000.  If they have held on to the shares, or waited to liquidate some/all until the past year, then the twins Facebook holdings (or cash receives from sales) could be $400 million or more.  On top of that, they started purchasing bitcoins when the USD to BTC ratio was still less than $10 to 1 BTC, and have reported that they control over 100,000 bitcoins.

What is the point of this?  Simply that they do not have any reason to push an incomplete exchange into the public.  They do not have to worry about large investors expecting profit in the near future, nor are they likely to be strapped for cash.

Instead, the two can take their time, ensuring that they have their exchange’s security perfected, licenses obtained, and system completely polished.  I do not know when Gemini will launch, nor do I have any insight into when their ETF will become available…but, I expect that when the exchange is brought into the light, it will be fully functional, and available across the entirety of the United States at the very least.

CoinX – Truly the First Regulated Bitcoin Exchange in the US

CoinX hasn’t made waves, and seems to be taking the slow and steady approach to becoming an integral part of the Bitcoin ecosystem.  This does not mean they have “missed the boat” or made mistakes.  One thing about regulators, and government institutions, that many people seem to overlook, is that they are generally unhappy when companies work around their rules.

Coinbase, and nearly every other Bitcoin-based MSB, has been operating in a grey area for quite some time.  Coinbase has been registered as a MSB in all 50 states for quite some time, yet continued to operate without MTLs.

A common question on applications for MTLs can be observed on Alabama’s “Form SA“, required by the “Sale of Checks Act“, which is required for all MSBs engaging in money transmission in Alabama:

Have you ever engaged in the business of selling, issuing or otherwise dispensing checks, drafts or money orders or other instruments for the transmission or payment of money in the State of Alabama prior to the filing of this application?

If the answer to this type of question is “yes”, then that is an automatic red flag, and could potentially delay approval of a license, or even result in the state refusing to issue a license.  However, on the other hand, if a company answered this question with “no”, but the state determined that previous services offered by the company were considered money transmission, then that could result in denial as well.

CoinX has avoided this issue completely by not offering any services to any state until obtaining the proper licensing, and has then partnered with other companies (like Trucoin, as I mentioned before) to use the licensing in a way that offers services in a 100% compliant fashion.  Not only do they have the ability to confidently state that they have not engaged in unapproved money transmission in the past, but can also show that they have received licensing in a growing number of states, and have met the requirements to maintain said licenses.

While I fully expect the Winklevoss exchange to launch with licensing in every state, I also would not be surprised if CoinX managed to secure licensing, in every state that requires MTLs, before Gemini launches.  However, Coinbase, even with it’s surplus of investment capital, may have a bit of trouble with some of the more strict states.

Coinbase vs. Gemini vs. CoinX

The three companies, as well as the current market leaders in the Bitcoin exchange world, are all vying to reach the top.  They all want to be THE dominant US exchange, and every company is taking a different approach to achieve this goal.  In the end, there may not be a clear “winner”, as it is quite likely that multiple exchanges will mature into stable, profitable businesses.  However, as with every market, there will be a market leader.

Which company will that be?  Only time will tell, but the answer may not be as obvious as many believe.  Luckily, competition is good, and should result in a better end product for the rest of us.

Full Disclosure:  I worked for Trucoin before starting Coin Brief, and have a vested interest in the company.  While this certainly causes some level of bias, I try to keep that out of my writing.  In this case, my experience with Trucoin, and connection to their team, gives me some level of insight into recent events.

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