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SecondMarket to launch first New York-based Bitcoin exchange

February 25, 2014: 6:02 AM ET

As Mt. Gox collapses, SecondMarket prepares to launch a Bitcoin exchange in New York.

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FORTUNE -- SecondMarket is spinning out its Bitcoin activities into a stand-alone company that eventually will include a New York-based exchange for the cryptocurrency, Fortune has learned. The move comes just as news is breaking that one of the world's most popular Bitcoin exchanges, Mount Gox, may be shutting down after a hack that has cost its users more than $400 million.

SecondMarket's move still needs to be formally approved during the company's monthly board meeting next week, but all of the pieces already are in place. The new company will receive from SecondMarket:

  • Digital currency asset management. This includes Bitcoin Investment Trust, the first-ever U.S. investment vehicle dedicated exclusively to Bitcoin. It sort of acts like a currency ETF, and was launched last fall.
  • Trading desk: SecondMarket has an 11-person Bitcoin trading team that originally was just a market-maker, but now is on both sides after Mt. Gox began disintegrating.
  • $$: SecondMarket will contribute approximately $20 million in cash and Bitcoin assets toward the new company.

Arguably more important than all of this is the exchange, which I hinted at in a post last Friday. The goal would be to reduce Bitcoin price volatility, by using spot pricing once or twice per day (like gold spot pricing) and serving as a clearing company in which member firms would clear all transactions by day's end. Members also would keep enough cash in Bitcoin to keep the exchange liquid.

RELATED: The next phase of Bitcoin investment

SecondMarket CEO Barry Silbert says that he's modeling it after the early days of The IntercontinentalExchange (ICE), and that he hopes to have a set of founding members in place by the end of March (i.e., a "seat" model). These members are expected to include Wall Street banks and well-funded Bitcoin startups (think Circle and Coinbase). Non-member firms or individuals would not be allowed to trade -- at least at the outset -- but likely could do business via the member firms.

Silbert is expected to serve as CEO of the new company, whose shareholders will be both member firms and also existing SecondMarket backers like  FirstMark Capital and Social+Capital Partnership.

RELATED: SecondMarket knew about Mount Gox troubles

He declined to comment on the developing situation at Mount Gox, which seems to represent both a challenge and an opportunity for his new exchange. A challenge because Gox's collapse could cause even the most ardent Bitcoin enthusiasts to distrust the cryptocurrency. Ryan Selkis, a Bitcoin entrepreneur and blogger, wrote the following last night about the Gox situation:

"I do believe that this is one of the existential threats to bitcoin that many have feared and have personally sold all of my bitcoin holdings through Coinbase.  I am a risk tolerant investor, but I believe this will be catastrophic for Bitcoin, both as a currency and as a fledgling industry."

The opportunity, however, is for an established entrepreneur like Silbert -- whose SecondMarket has been known to trade pre-IPO shares in companies like Facebook -- to create an exchange that Bitcoin users can trust. Key to this may be oversight. The exchange, which does not yet have a name, would launch as a self-regulated organization. But Silbert recognizes that its ultimate future is likely to be under the auspices of the New York Department of Financial Services, which recently held a Bitcoin hearing at which Silbert testified.

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Dan Primack
Dan Primack
Senior Editor, Fortune

Dan Primack joined Fortune.com in September 2010 to cover deals and dealmakers, from Wall Street to Sand Hill Road. Previously, Dan was an editor-at-large with Thomson Reuters, where he launched both peHUB.com and the peHUB Wire email service. In a past journalistic life, Dan ran a community paper in Roxbury, Massachusetts. He currently lives just outside of Boston.

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