May 27, 2014 6:44 pm

Silicon Valley’s rush to back Bitcoin services rouses concerns

Freshly minted Bitcoins.©Bloomberg

Silicon Valley is in danger of promoting a new wave of Bitcoin services for consumers and merchants before the digital currency is secure or stable enough for the mass market, according to some entrepreneurs and financiers working in the field.

Some of the US technology industry’s leading lights have joined the rush to build companies around Bitcoin, seeing it as the foundation for a new financial services industry independent of the current banking system. That has led to a spate of start-ups trying to make it easier for consumers to make payments with the digital currency, and for merchants to accept it.

But a potential lack of security, extreme levels of volatility and regulatory uncertainty make Bitcoin highly unsuitable for such uses, critics say.

“It’s an idiotic sideshow,” said Wences Casares, founder of Xapo, a Silicon Valley start-up that recently launched a service for holding the currency. The relatively small market for Bitcoin – the total amount outstanding is valued at about $7bn – means it is likely to be years before it becomes accepted as a currency for payments, if ever, he added.

Significant parts of the infrastructure needed to support the mass-market use of Bitcoin are also still lacking.

A lack of guaranteed security for the “wallet” services where consumers hold their Bitcoins is one of the biggest obstacles, said Adam Shapiro of Promontory Financial, a consulting firm. Most banks have also held back from working with Bitcoin companies given the regulatory uncertainty surrounding the area, he added.

Despite that, US start-ups have rushed into the field, drawn by hopes that the Bitcoin protocol, like the internet protocol underpinning the web, will provide the foundation for a wave of new applications that disrupt the existing finance industry.

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Halsey Minor, a serial entrepreneur and investor who co-founded online news site Cnet and was a prominent early backer of Salesforce.com, joined the race earlier this month with an attempt to take the volatility out of paying with the currency. Users of Bitreserve, which is currently in a private test phase, would have their accounts denominated in whatever currency they choose, with Bitcoin only used as the “back end” of a payments system that would make it possible to move money without incurring the usual fees.

The size of venture capital rounds for Bitcoin companies has also escalated sharply in recent weeks, with a $30m investment earlier this month in Bitpay , a company in Atlanta, and $25m in San Francisco-based Coinbase. Prominent investors who have jumped into the field in recent months include Marc Andreessen, developer of the first web browser, and Jim Breyer, an early backer of Facebook.

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Their rush to back companies building applications for the currency echoes the stampede to invest in consumer internet start-ups in the mid-1990s, after the launch of Netscape’s first browser opened the web to wider consumer use.

But doubters argue that the first successful Bitcoin companies are more likely to be involved more in the back-end “plumbing” needed to make the currency secure and stable, rather than in mass-market services.

“It’s like the beginning of the internet, the first cases were pretty boring,” said Mr Casares. “The really sexy things came later.”

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