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August 11, 2014

Bitcoin’s growing popularity stirs new business, wary regulators

Photo | CNN There are currently about 11.9 million bitcoins in circulation, according to the website Blockchain.
Photo | Contributed Josh Garza, founder of Bloomfield startup GAW Miners, which sells computers to bitcoin “miners.”
By Alexander Soule

It takes some serious coin to underwrite the kind of growth Josh Garza is predicting for his four-month-old virtual currency computer software company, GAW Miners.

With 35 employees, GAW is already threatening to outgrow its new Bloomfield headquarters, even before construction is complete for initial occupancy.

GAW Miners sells computers installed with software that validates and ensures the security of financial transactions using bitcoins, the virtual currency created outside the purview of government central banks.

GAW Miners sells computers, and other accessories, to bitcoin “miners,” who track, verify, and record virtual currency transactions and get rewarded for their services with new bitcoins. Garza said he is projecting $50 million in revenue and a workforce of 100 by the end of the year.

It's a bullish outlook as GAW Miners tries to cash in on bitcoin's growing popularity.

One thing that could stand in the company's way, however, is bitcoin's uncertain future.

Connecticut, other states, and the federal government are mulling whether to craft new rules to prevent any abuses associated with bitcoin, which is currently unregulated. The virtual currency is traded over online exchanges and can be used to buy merchandise.

Federal and state regulators are grappling with whether to enforce new or existing regulations on virtual currencies, and if so, how to do it without needlessly chilling growth in the burgeoning sector.

“I don't think we're that far away from somebody requesting an ATM in bitcoin; and I think once that's on the playing field then you've got to have regulations,” said Howard Pitkin, commissioner of the Connecticut Department of Banking. “I've got lawyers looking at the structures of the law that presently exist and where we should fit it in.”

The potential avenues for regulation are many including new consumer protection laws and reporting and tax requirements. In March, for example, the Internal Revenue Service ruled bitcoin is a property, rather than a currency, and began requiring bitcoin users to record all their virtual currency purchases to account for any fluctuations in value, which would be taxable.

More recently, the state of New York has proposed its own regulatory framework for virtual currencies, including requiring “BitLicenses” for many bitcoin merchant and banking activities.

In two-days of high-profile hearings on the topic in January, New York Department of Financial Services Commissioner Benjamin Slawsky likened the current landscape to a “virtual Wild West” that was untenable in the long term due to consumers lack of confidence in the system, unstable prices, and virtual currency systems that serve as a magnet for criminal activities.

Some organizations supporting bitcoin have voluntarily adopted stringent policies under existing laws and regulations. At a 2013 hearing held by the Council of State Bank Supervisors, a national organization that Pitkin is part of, the chief financial officer of merchant services firm BitPay noted his company monitors transactions and verifies that its merchant customers are compliant with relevant U.S. laws.

Garza says he started GAW Miners — an acronym that stands for Geniuses At Work — after falling victim to a scam in which he never received a bitcoin mining computer he paid for. Frustrated by untrustworthy vendors, he saw the potential for a company that reliably sells bitcoin mining computers.

Garza says he welcomes the idea of regulation, provided it doesn't discourage businesses and consumers from executing bitcoin transactions. One advantage of virtual currency deals, he said, is that they can be accomplished with a few clicks, a welcome change from the at-times burdensome requirements banks or credit card companies have for completing transactions in larger amounts.

Steve Yanicke, president of MakeHartford, an organization that supports startups and inventors, said his group has been fundraising to support its operations and he marveled at the ease with which he was able to accept a bitcoin donation, after a benefactor offered one in lieu of other payment forms.

“The technical process of actually setting up the account and getting it done, I think, was less than 10 minutes,” Yanicke said. “I've got friends who do not necessarily invest in bitcoin, but who do hold it as part of their portfolio, like they would gold.”

Yanicke said MakeHartford has had conversations about whether to offer a bitcoin ATM in its space on Arbor Street or another location in Hartford, weighing the benefits of potential foot traffic against any costs associated with permitting or other regulatory factors.

Businesses should consider opening a channel to accept bitcoins simply for the attention it would garner among customers, Garza said. Transactions can also be cheaper to process than credit card payments.

Meantime, Pitkin said bitcoin and other emerging currencies are high on his regulator radar and that he is monitoring developments in other states. Still, he offered no specific preview of what Connecticut can expect under any new regulatory treatment.

“Honestly, I hope [bitcoin] becomes regulated,” Garza said. “Things can't become legitimate unless they are — it's just the way it is. That's what makes things become mainstream.”

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