itBit sent out an announcement Thursday stating that they would no longer serve the most bitcoin friendly state in the United States, Texas.

This was done with absolutely no explanation or notice and they want everybody gone now. Traders have only 5 days to remove their funds from itBit wallets and get the hell out.

Why on earth would they do this? There might be a pretty simple reason behind all of this. They may simply be in over their heads or on the verge of changing company direction and need to scale back to survive or make a move.

This cannot be directly specified but it's about the only thing that makes sense looking at the data.

 It's Unlikely Regulation

First of all we know its not regulation. Whereas itBit's charter may come into question in some states (there is no evidence that this happened here) it really doesn't matter in Texas. Even if the state refuses itBit's charter to store Unites States currency on its exchange, that has nothing to do with OTC trades and they don't need a license for this activity in Texas. 

Texas was the first in the United States to denounce any requirement of a money transmitters license in the United States which led the way for other states like Kansas who used Texas as a guide to rule on its regulations. 

They both for the most part say the same thing, but this is an excerpt from Texas 
Memorandum 1037

...Exchange of cryptocurrency for sovereign currency between two parties is not money transmission. This is essentially a sale of goods between two parties. The seller gives units of cryptocurrency to the buyer, who pays the seller directly with sovereign currency. The seller does not receive the sovereign currency in exchange for a promise to make it available at a later time or different location...

Furthermore most exchanges have received letters of no-action from the state of Texas on top of the memorandum including large exchanges like Coinbase. 

Poor Communication

We also know that itBit wanted to keep this as low key as possible and did a likely intentional poor job of communicating the decision.

There is also absolutely no mention of this on their blog, under their company announcements, or anywhere else we could find. It appears as if itBit didn't want to make allot of noise about this. dinbits specifically did not report it a first due to its perplexing nature.

It was notified by email only and some Texas residents and itBit customers actually did not receive the correspondence. At face value  it looked possibly untrue, but Friday Kyle Arteaga² verified that itBit's exit is accurate.

Thus we know its not regulatory and they wanted to keep it low key.

Major Market Loss

Texas is a major economy and not just in the United States. Globally. 

It's economy is so large in fact that if it were a country it would be an economic powerhouse and the 12th largest economy in the world. To put this into comparison, Texas is larger than the entire country of Australia in both its economy and population. It also constitutes 30% of the land area in the contiguous United States.

GDP by Country (in billions USD)

It's bitcoin economy is booming as well so this is a major self inflicted market loss for itBit.

That tells us that they are purposely throwing away a large share of the countries bitcoin economy and economy in general since Texas by itself makes up for 10% of the entire United States GDP and they wanted to do this quietly.  

With no apparent reasoning behind this decision, the size of the loss, and the manner in which they made the announcement, we can draw one realistic conclusion.

Self Preservation, Not Self Destruction

There have been big hopes for itBit, the startup company which came out of nowhere last year with a fresh seed round of venture capitol funding and introduced themselves with class.

They surprised most with an strong staff and tackled regulatory compliance by obtaining a charter in lieu of money transmitting licenses in all 50 states (or the 44 states that require them). They were also the first exchange to offer a FIX interface for trading systems and quickly became a new OTC source for volume traders and other tools appealing to professional traders and financial institutions.

Then things started to get a bit weird and some of their actions questionable but this latest stunt is seemingly the oddest behavior yet. In a nutshell, itBit just threw out 10% of the United States economy and likely a much larger portion of the bitcoin economy for no apparent reason.

Why the self destructive behavior? They didn't have to... or did they?

The seemingly self destructive behavior may be self preservation. It's possible that itBit is scaling back because they lack the assets and procurement to sustain their practice. In other words, they cannot keep up with demand and are trying to slow down as easily, quickly, and painlessly as possible.

Texas makes sense. They can't do New York (3), that's where they are based. They don't want to do California(1) or Florida(4) since those are grey areas that could be problematic to re-enter at a later date and by the time you get to the next bitcoin friendly state on the map (Kansas) you are nowhere near the trillion dollar economy line that the top 3 far exceed so it stops making sense. To trim the same amount of fat and include bitcoin friendly states or leaning favorably you have to build a long list.

Its all the way down to North Carolina and Arizona before we see the next sizable bitcoin friendly states where North Carolina allows bitcoin trading without a license so long as its a registered entity and Arizona is a very grey state.  For an example, we picked a list of likely candidates for omission that are both bitcoin friendly for re-entry and equate to a similar GDP volume when combined. 

State GDP

 $     295,445.00

 $       45,799.00

 $     146,216.00

 $     140,608.00

 $     196,887.00
South Carolina

 $     503,745.00
North Carolina

 $       40,170.00

 $     192,874.00

 $       56,323.00
Rhode Island

 $       45,415.00
South Dakota

 $ 1,663,482.00

$ 1,648,007.00

Kansas is favorable having followed their guidance after Texas, Montana and South Carolina have no money transmission regulations, Wyoming is leaning favorably having recently introduced a favorable, Kentucky states they have no stance, and Nevada is Nevada where just about everything is legal. After that the pickings get a bit slim but South Dakota and Rhode Island have the most probable likely hood for ease of compliance.

If we take those 10 states then you would get about the same GDP as the state of Texas but some of these states do not necessarily have the depth of bitcoin activity so it could mean more. However the point is that its allot easier to cut one single state than it is to cut 10 states because 1 state oppose to a fifth of the country just sounds better.

It's cleaner, easier, and itBit faces less friction getting back in assuming the bridges aren't already burnt.  Texas allows itBit to trim the fat in a single state instead of 10 or more and reduces the stress on their OTC practice and sounds better in the media (except maybe here) as not to cause panic with their investors. This is all coming just 94 days before the block halving which will additionally strain newly created coin supply and that might also be a concern of itBit. 

We have to remember that this company is barely alive. They were born about this time last year and we introduced them last April. They weren't around during the first halving and to be honest nobody knows how the daily creation is going to affect anything and at the rate they slammed into the OTC market, it actually makes plausible business reasoning to do this with all the given factors.

Texas is also a major market where itBit's departure will be insignificant to Texas and itBit users have likely already replaced them, although most major players don't use any single source for procurement so it's likely to even matter less since anything allocated to itBit will simply be absorbed across the board. In other words, this is unlikely to really piss anyone off since its unlikely the majority will really care which also makes it easier to return at a later date.

That said, it could have the adverse reaction since many companies are competing for high volume traders and anyone using itBit as one of its primary sources just got slapped in the face and is unlikely going to be thrilled to use the platform again. 

Just An Opinion

Although there are many facts in the article, this possible reasoning is just an opinion based on the given situation, it may be completely off-base but its the only thing that remotely makes any sense at all.

That said, its still millions in lost monthly revenue for itBit and for a startup company of their size this might be a bit of a strain but the alternative could be a disaster. If they cut out 10+ states it would look really bad for a company known for its availability country-wide.  It would be a lie to state that they don't look like a bunch of idiots since this does appear to be a very silly thing to do. 

If we take a look from this from different angles, it seems that they have either done something really smart or one of the dumbest things in the history of the industry. 

Story by dinbits
Banner image by staff

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