"There is no authority or regulation that says what they must provide, how they must provide it, what to do if something goes wrong," Hughes says.
Wallets have been hacked, and as with physical cash, you can't get bitcoins back once they're gone. On top of all this, the exchange rate between bitcoins and traditional currencies has been volatile – you can see for yourself on sites like BitcoinCharts.com.
It took me months of futzing around in my spare time to acquire my first $60 or so worth of bitcoins on Monday. Yet once I had the coins, I was able to send some to a Twitter acquaintance in London, quick snap and dirt cheap. If entry and exit from the system were easier, this technology could become a more viable alternative to established financial players.
Easing Bitcoin's choke points is the business of BitInstant, a New York startup. The company's flagship service expedites the transfer of funds to and from the exchanges, for which it charges a commission. Charlie Shrem, the founder and CEO, says that in two to three months it will come out with a reloadable general-purpose prepaid debit card. Each card will come with a Bitcoin address printed on the back and a QR code, along with the MasterCard logo, on the front. Cardholders will be able to convert bitcoins held at the address to dollars stored on the card by scanning the code into a smartphone. The dollars would then be available to spend wherever MasterCard is accepted. In theory, this should make getting in and out easier, and make Bitcoin more attractive as a conduit for funds.
Erik Voorhees, BitInstant's chief marketing officer, says Bitcoin skeptics often ask, "What can I spend them on?" The card, he says, will provide "the ultimate answer…Everything."
Of course, the banking system will have to be involved here, since only insured depositories can issue cards on the MasterCard network. Shrem would not identify the two banks that will issue the BitInstant card; one will issue it in the U.S., the other internationally, he says. After some of the blogosphere reports about the card this week, BitInstant had to clarify that unlike Bitcoin addresses, the cards themselves won't be anonymous and will comply with anti-money-laundering and know-your-customer regulations. Dollars stored on the U.S. card will be FDIC-insured. Notably, BitInstant is registered as a money-services business with the Financial Crimes Enforcement Network.
Bradley Leimer, the vice president for online and mobile strategy at Mechanics Bank in Richmond, Calif., has been keeping an eye on Bitcoin. Linking it to a prepaid card, he says, is "a little bit of a game-changer," since it's "a much more mainstream way to move the value within your bitcoin collection."
However, using a MasterCard debit card as the exit means someone will still be "incurring a transaction cost at some point," Leimer says. "It doesn't necessarily lower the transaction cost to near-zero." (Shrem says BitInstant will try to minimize cardholder fees by dispensing with the middlemen usually involved with prepaid cards, i.e. "program managers" like Green Dot.)
Individual states give licenses to money transmitters.