One Step Back, Two Steps Forward: Digital Currencies Making Headway Through Regulation

The April Bitcoin bubble was exciting, really exciting. From the moment the old $32 record was broken, to the days after the $266 bubble popped, I think I slept no more than five hours a night, and that was for a month straight. In fact, I still find it difficult to fathom that I can type out a number like "266" and actually be referring to reality. It wasn't that long ago that $20 seemed like a figure we'd never see again.

But what the hell has happened since? It's been five months, and frankly things around here have gotten really quiet. I almost feel like shouting, "last one out, get the lights!"

Mt.Gox is on life support, to the point where today's volume on BitStamp was nearly 200% greater than volume on Mt.Gox. The Silk Road is gone, though that gap will no doubt be quickly filled. Trading on Tradehill has ground to a halt until regulatory issues are sorted out. BitInstant is still nowhere to be seen, though rumor has it they'll be resurrected shortly, which will be a relief to the Winklevoss twins.

As of today, US residents are no longer allowed to use BitFunder. Similarly, all trading has halted on BTC Trading Corp.

Lets face it, the wild wild west era of Bitcoin is over. Cracking that billion dollar market cap was the death knell for anyone handling money without the proper licensing. For all you "crypto-anarchists" out there who were hoping to give the government the middle finger and construct a new financial paradigm, sorry, but it just doesn't work that way.

The digital currency economy is now re-building itself, but this time it's being done properly. Bitstamp now requires proper verification before money can be moved into and out of the exchange, even if it's via Ripple. Kraken ensured it had the proper licensing before even launching the site. As a result, many would-be clients find themselves unable to use its services for the moment, but that's better than being able to use the site and then having your funds locked up due to a regulatory violation. From Kraken:

"Our business is compliance, and we have this exchange we sometimes work on in our spare time.  Payward has led the charge in the formation of DATA and we are committed to operating only where we can operate legally.  As a consumer, you may find this inconvenient and as a business it does put us at an immediate competitive disadvantage.  The industry has, unfortunately, seen where shortcuts take us and our long view is that the only way out is through."

You might just say Kraken knew what it was doing. As a result of putting regulation first, they've been able to open themselves up to certain US customers, and even just announced a partnership with a real, licensed, insured, regulated bank in Germany, Fidor Bank AG, which will pave the way for mainstream adoption of Bitcoin, Litecoin, Ven, and Ripple.

Similarly, Ripple just announced a partnership with ZipZap, another regulated entity that competes with the likes of Western Union. Just today, CoinX, launched their "compliant" Bitcoin exchange, with emphasis on compliance.

So all that to say, yeah, Bitcoin had an exciting couple of years, but it really wasn't possible to move forward without taking a step back to sort out the regulatory issues. Now, Bitcoin and other digital currencies can thrive, and will really prove their value in the coming months and years.