SPEND MONEY ON NEW MONEY

Inc. (USA) - - MONEY -

You’ve prob­a­bly heard of Bit­coin—but what about Ether, Do­ge­coin, and Zcash? Most such on­line-only “cryp­tocur­ren­cies” aren’t con­trolled by gov­ern­ment en­ti­ties like the Fed­eral Re­serve. That has helped them at­tract a fol­low­ing among dig­i­tal pri­vacy ad­vo­cates, in­vestors look­ing for the next hot com­mod­ity, and, yes, less sa­vory el­e­ments look­ing for a dig­i­tal equiv­a­lent of un­trace­able cash.

WHO IS MAK­ING MONEY

Fi­nan­cial ser­vices and tech­nol­ogy star­tups, es­pe­cially those with ex­pe­ri­ence in the com­pli­cated

and highly reg­u­lated fi­nan­cial mar­kets, are best po­si­tioned to jump into the world of vir­tual money—or the re­lated “blockchain” tech­nol­ogy that helps it move around the dig­i­tal uni­verse.

HOW TO DO IT

Your big­gest busi­ness op­por­tu­nity is to start what’s known as a dig­i­tal wal­let or an ex­change, where you gen­er­ate rev­enue by charg­ing fees to buy or sell these vir­tual as­sets. (Ex­am­ples in­clude the San Fran­cisco–based star­tups Coin­base and Kraken, and the Omaha-based Ex­o­dus.) Some star­tups are look­ing to the blockchain, de­vel­op­ing and sell­ing ap­pli­ca­tions for this new type of fi­nan­cial sys­tem. James Gatto, a part­ner spe­cial­iz­ing in vir­tual cur­rency for law firm Shep­pard Mullin, calls blockchain-re­lated tech “the great­est value of the whole bit­coin ecosys­tem.”

WHO’S SUC­CEED­ING

One of the lead­ing dig­i­tal cur­rency star­tups is fiveyear-old ex­change Coin­base. It counts 4.5 mil­lion cus­tomers, who buy and sell cur­rency on its web­site. The com­pany has fa­cil­i­tated $5 bil­lion worth of trans­ac­tions for con­sumers and in­sti­tu­tional in­vestors. “The line be­tween in­vest­ing and use has been blurred with the ad­vent of dig­i­tal cur­ren­cies,” says co-founder Fred Ehrsam.

THE RISKS

Reg­u­la­tion! Though the cur­ren­cies them­selves may not be gov­ern­ment con­trolled, those that han­dle them must nav­i­gate U.S. fi­nan­cial rules. Ehrsam es­ti­mates that his startup has spent $10 mil­lion on red tape, in­clud­ing get­ting reg­is­tered by the U.S. Trea­sury and ob­tain­ing money trans­mit­ter li­censes in dozens of states. (Coin­base is also field­ing an IRS probe over users buy­ing Bit­coin to avoid pay­ing taxes.) An­other chal­lenge was the time-con­sum­ing process of es­tab­lish­ing bank­ing re­la­tion­ships to let users sync their fi­nan­cial ac­counts. As Ehrsam says, “The busi­ness is a re­ally hard one to build.”

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