US has Already Ceded Dominance in Bitcoin Trading

Expertise and dominance in a particular industry sector doesn't come about by decree. It is achieved over years through repeated practice and creative experimentation.

During the first three-and-a-half years of bitcoin's development from 2009 to 2012, a large portion of that technological experimentation had been occurring in the US with multiple bitcoin trading exchanges and bitcoin-related businesses.

Now, there exists only one functioning exchange in the US with diminishing volume compared to its competitors. The Atlanta-based exchange, Camp BX, had reached such a low point of average daily trading volume that it was removed from the CoinDesk BPI earlier this month.

Although the future may not look bright for the US jurisdiction, it does not appear to be a conscious decision on the part of legislators and regulators. The evolving body of law known broadly as "digital currency law" applies at both the federal level and the state level creating overlapping licensing regimes and a considerable compliance investment for new startups.

A pair of Senate hearings will take place next week in Washington, DC, with the first hearing being held by the Committee on Homeland Security and Government Affairs and the second hearing being held jointly by the Banking Subcommittee on National Security and International Trade and Finance and the Banking Subcommittee on Economic Policy.

These government hearings will be largely educational briefings focusing on law enforcement, regulatory environment, national security, and the possible opportunities for bitcoin in payments and global transactions. Several bitcoin-related companies will be testifying along with the Bitcoin Foundation.

Of course, there isn't a ban on bitcoin in the US. But there doesn't have to be an outright ban when there is a chilling effect on banking that translates into an unwillingness for banks and credit unions to engage with bitcoin-related companies.

Given the labyrinth and ambiguity of state-by-state compliance issues, financial institutions conclude that it's far safer and easier to ignore bitcoin-related opportunities. This is the largest single barrier to payments innovation in the US.

Adversely, the unintended consequence is that viable and innovative companies seek more hospitable locales in non-US jurisdictions. So, where is the bitcoin trading volume going? How does important price discovery occur for bitcoin?

Currently, the top four bitcoin exchanges by volume are located outside of the US, with the world's leading exchange based in China.

Less than 2% of worldwide bitcoin trading and real-time market making occurs within the US jurisdiction. (Coinbase provides only fixed-rate conversion with the US dollar and they do not hold any customer funds in US dollars.)

All four of the world's leading exchanges have demonstrated a capacity for serious, engaged banking relationships that would have been unobtainable in the United States.

As of 14th November, here is the list in sequential order based on 30-day cumulative bitcoin trading volume (for single trading pair):

(1) BTC China traded $298.4m in XBT/CNY (based in China)

(2) Mt. Gox traded $232.8m in XBT/USD (based in Japan)

(3) BitStamp traded $200m in XBT/USD (based in Slovenia)

(4) btc-e traded $119.8m in XBT/USD (based in Bulgaria)

Separately, in terms of active bitcoin nodes on the network, the US ranks first, followed by Germany, China, the UK, and Russia. Representing 25.7% of all active nodes, the US can probably claim the largest number of worldwide bitcoin users as well.

However, this measure is severely disproportionate to its slice of worldwide trading volume. Trading volume and liquidity is "sticky" and the jurisdictions adopting the bitcoin exchanges will exert the most influence over the new bitcoin economy. They will become entrenched.

We have arrived at the point where the US jurisdiction must strategically evaluate a path going forward. Either they enable a climate that appeals to bitcoin exchanges and businesses or they maintain barriers that silently drive innovation in the space overseas.

Delaying that moment serves only to increase the clout and power of the other jurisdictions competing for this lucrative business. A free and robust bitcoin economy drives growth and jobs, provides relief for the unbanked, and facilitates global financial inclusion.

Another interesting metric is the ranking of the Narrow Bitcoin Money Stock (M1) compared to the money stock of all separate nations (and the European Union). At approximately $5bn, bitcoin money stock currently ranks at 100 out of 191, recently surpassing Iceland and Lebanon.

In some ways, government hearings on the Bitcoin protocol are like studying gravity. It's useful information if you didn't already understand the properties, but it does not allow much latitude for alteration. A futuristic potential Govcoin would be merely one of many cryptographic monetary units.

At the end of the day, all this attention on anti-money laundering laws and financial crime may be misplaced, because the real show with bitcoin will be at the Federal Reserve and the potential impacts on administering monetary policy.

Disclaimer: The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, CoinDesk.

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