Bitcoin going mainstream? Exchange approved to operate as a bank

Bitcoin Central, a Bitcoin exchange that is popular in the eurozone, says it has secured approval from regulators to operate as a bank under French law. The announcement could be another sign of the cryptocurrency's growing legitimacy.

The news was announced in a Thursday post on the Bitcoin forums. A representative for Paymium, the French company that runs Bitcoin Central, said the firm had partnered with the French payment processor Aqoba and the French bank Credit Mutuel to create a Bitcoin-based payment service. Users will be able to deposit funds in either euros or bitcoins, and to easily convert between the two.

Approval by the French authorities has several key advantages, according to Paymium. Euro-denominated funds will be insured by the Garantie des dépôts, the French equivalent to the US FDIC. The accounts will also be integrated with the French banking system, so users can have their paychecks automatically deposited into their accounts and converted to bitcoins. And Paymium hopes to roll out a debit card that will allow users to spend their bitcoins directly at traditional retail outlets.

It remains to be seen whether Paymium's new business partners will still be enthusiastic about the relationship once the system is up and running. The pseudonymous design of the Bitcoin network makes it inherently difficult to detect and prevent fraudulent transactions. And the irreversibility of Bitcoin transactions makes it hard to deal with fraud after the fact.

Earlier this year, the US-based Bitcoin exchange Tradehill was forced out of business by a dispute over fraudulent payments with the payment processor Dwolla. Users would transfer dollars to Tradehill, convert them to bitcoins, and then use "chargebacks" to get their dollars back. Dwolla blamed Tradehill for these fraudulent transactions, and Tradehill says the company withheld more than $160,000 from it as a result, contributing to Tradehill's bankruptcy.

It's a virtual certainty that Paymium's service will be targeted by fraudsters using similar tactics. How it handles those problems will be an important factor in the venture's success or failure.

Disclosure: I own some bitcoins.