Quote from: Nagle on September 29, 2013, 06:48:29 PM

To run a proper Bitcoin exchange in the US, you need to register with the SEC as a broker/dealer. That lets you accept trading transactions for anything tradeable. A "broker", under US law, is "any person engaged in the business of effecting transactions in securities for the account of others." It includes "persons that operate or control electronic or other platforms to trade securities". There's some argument over whether Bitcoin is a "security", but if you're registered as a broker/dealer, that takes care of that problem. Every brokerage in the US, big or small, has been through this process.

This isn't just filling out a form. A broker-dealer may not begin business until:

1. it has properly filed Form BD, and the SEC has granted its registration;
2. it has become a member of an SRO;
3. it has become a member of SIPC, the Securities Investor Protection Corporation;
4. it complies with all applicable state requirements; and
5. its "associated persons" have satisfied applicable qualification requirements.

These requirements are to prevent brokers from stealing customer's assets. First, there's form BD, which covers who's behind the business, who's really behind the business, and the criminal history of everyone involved.

Then there's becoming a member of a Self Regulatory Organization. This would be FINRA or NASDAQ. FINRA can and does fine its members for rules violations; $102 million in fines in 2012 alone, and 692 cases referred for criminal prosecution. (That's why brokers are so heavily regulated.)

Then there's becoming a member of the Securities Investor Protection Corporation. This is an insurance company. Each customer is insured for up to $500,000 if the broker goes bust or steals their money. (Something the Bitcoin world is all too familiar with.) Brokers pay premiums to SIPC.

Then there are qualification requirements for the people involved. There are exams. The principals of the business have to pass at least the FINRA Series 24 (General Securities Principal) exam, which covers things like "Supervision of Brokerage Operations" and "Compliance and Financial Responsibility". And FINRA Series 27 (Financial and Operations Principal), which covers "Customer Protection Rules" and "Net Capital Requirements". Probably some others, too. The standard exam for a "stockbroker" is FINRA Series 7, and if there are people involved who actually sell, they have to pass that exam. There are exams for lower-level people, such as FINRA Series 11 (Assistant Representative - Order Processing). That's right, there's an exam for the people who do phone support.

One way to do this is to buy an existing small broker/dealer. Here's a list of broker/dealers for sale. For $105,000 someone could buy an inactive broker/dealer registered in 19 states. That takes care of most of the registration problems. All the registration info will have to be updated, but that's easier than doing this from a cold start. The name of the company can be changed at this point if desired.

Then you hire some people who've already passed the tests. It's not hard to hire people who have passed these tests, since Wall Street has downsized somewhat in recent years. The principals have to study up and pass their tests, but it's mostly memorization and knowing the rules. They'll need a law firm, an accounting firm, and an auditor.

Then they can start up a Bitcoin exchange without regulatory problems. Their customers will have the confidence that their assets are insured and outside auditors and regulators are watching.

Bitcoin needs an exchange like this.

This has lots of advantages. You can take orders through other brokers. Banks will deal with regulated brokers. You can get hooked into SWIFT, ACH, and the credit card systems.

Bitcoin is a security? That is quite the statement. It doesn't quite fall into the incredibly broad definition of "security" under the Securities Acts of 1933/1934 and Supreme Court guidance states that securities are "schemes devised by those who seek the use of the money of others on the promise of profits".

That's not to say that Bitcoin won't someday be declared a security -- either that or a commodity -- to put it under some regulatory rubric but, as of right now, it is not.