Back when Equities.com first began covering bitcoin back in October, we detailed the process investors had to go through to convert their “fiat” to the cryptocurrency. During our initial research, we forewent using the exchange Mt. Gox, at the time the closest thing bitcoin had to a market leader, because we found it weirdly demanding of personal information. Par for the course for an unregulated market to be full of sketchy institutions, but there appeared to be better alternatives, so we went elsewhere.
Color us unsurprised when Mt. Gox was indeed untrustworthy, going belly-up in February, and taking hundreds of thousands of bitcoins with them (only to “find” a quarter of them on March 21.) Mt. Gox’ management is either incompetent, or a bunch of criminals. It doesn’t really matter which, because either way, as operators in an unregulated market the exchange is under little obligation to do much of anything at all to rectify the situation.
At least JPMorgan and Chase Co. (JPM) and Goldman Sachs Group (GS) try to cover their tracks or at least come up with stories better than “whoops” when they defraud customers. And at least some of the time, they are forced to pay people back a very substantial amount of that money. But when there’s no “police” like the SEC or DOJ, you don’t exactly have to be unsubtle about robbing people, nor fully recompensating them.
The bitcoin community, and the major analysts covering bitcoin, seem to believe that a Mt. Gox can’t happen again. That, as the bitcoin institutions become more “well-oiled and sophisticated” as the New York Times asserted on Friday, preventing another amateur fleece job like what happened with Gox taking place again. But what’s to stop them?
Some kind of marketplaces are a necessity for a functional currency. Bitcoin cannot move from pure speculation to a liquid currency unless people have places to trade it on a widespread scale. And only the most ignorant ideologues will try to argue that an economy can function without lending – and why would anybody lend anything in a decentralized market with no force to keep people from reneging on a deal?
Despite bitcoin’s impressive workaround of the Byzantine’s General Problem, a sophisticated economy simply needs trusted third parties to enforce those things, lest a more sophisticated Mt. Gox pull off an even bigger caper. Of course, that would ruin what many bitcoiners love about bitcoin. That nobody needs to trust anybody.
But bitcoin can’t have its digital cake and eat it too. The market either has to give over to licensed exchanges – that is, not just ones that appear more slick and sophisticated, but actually have some kind of third-party backing of depositor’s funds – or wallow in its illiquid, speculative, primitive state, where Gox is not the exception but just the first in a series of inevitable massive frauds.