February 10, 2014
Authored by: Bryan Cave Leighton Paisner
If you hear the word “Bitcoin” and roll your eyes, a glimpse into the Bitcoin economy may inspire a new respect. In Spring 2013, the Bitcoin economy topped the $1 billion mark for a time, which is more than the economy of some small countries. This is not a pyramid scheme — this is potentially a whole new way of making payments.
What is Bitcoin?
If you are not a technology guru, Bitcoin can be a difficult concept to wrap your arms around. Bitcoin is a crypto-currency designed to create a new kind of money. Bitcoin uses cryptography, or a combination of mathematical theory and computer science, to control bitcoin transactions rather than centralized authorities. Bitcoin is the most popular live trading cryptocurrency within the cryptocurrency network, and is used to purchase items through online bitcoin retailers, small businesses, and even to purchase drinks in bars.
The decentralized nature of the Bitcoin network makes it difficult to regulate and control. There is no single government or organization controlling the Bitcoin network; rather it is an open source project that is governed by consensus of its users. Bitcoin users value the privacy, security and freedom created by the decentralized network, and there is a strong interest in a currency that is not tied to one particular government. Developed in 2012, the Bitcoin Foundation, based in Seattle, works to promote the currency, improve standardization and security, and advance the core principles of “non-political economy, openness and independence.” Regulators are not standing on the sidelines and the regulatory field changes almost daily. Courts are finding Bitcoin is a “currency.” State and federal regulators are determining that virtual currencies are subject to money transmitter requirements. In March, FinCEN issued guidance indicating certain virtual currencies and exchanges need to comply with money services business requirements. In recent weeks, New York and California, among other states, took steps to pull certain Bitcoin companies within the requirements of the state money transmitter licensing laws.
A recent letter from the Senate Homeland Security Committee to seven federal agencies requests feedback for regulation of virtual currencies and notes concerns with these currencies including the concern that “their anonymous and decentralized nature has also attracted criminals who value few things more than being allowed to operate in the shadows”.
We are not in Kansas Anymore: How to Do Business With Bitcoin Companies
In light of the risks, there are a number of reasons why banks are nervous about doing business with Bitcoin companies. In the past, banks have tended to analyze risk carefully when entering into relationships with money services businesses. Over the last several months, banks in the U.S. and around the world have canceled or closed the accounts of some Bitcoin customers, and many Bitcoin companies enter into discussions with multiple banks, large and small, trying to secure a strong banking relationship. One New York virtual currency exchange popular for trading bitcoins, Bitfloor, closed its doors in April after Capital One Financial Corp. closed its account. PNC closed the accounts of FastCash4Bitcoins in the spring, preventing them from receiving wire transfers. In August, Commonwealth Bank, one of the largest Australian Banks, closed the accounts of a Bitcoin payment processor, CoinJar.
In the growing Bitcoin economy, the banking relationship is a key factor in survival, growth and success. Not all Bitcoin companies are the same, and there’s no reason a compliant Bitcoin company shouldn’t be able to get banking services. Here are factors to consider if a Bitcoin company seeks a relationship with your bank:
- Is the Bitcoin company compliant with the traditional regulatory requirements for financial institutions including Bank Secrecy Act regulations?
- Is the Bitcoin company registered as a money services business in accordance with the FinCEN guidance issued in March and has the company fully implemented an effective AML and Know Your Customer compliance program?
- Even if not required, what procedures are in place for the Bitcoin company to collect the personal information on customers and transactions? Although Bitcoin is favored by some for its anonymity, Bitcoin intermediaries can implement procedures to voluntarily comply with obligations.
- Is the Bitcoin company licensed under state money transmitter laws? And if not, have they received legal opinions on why a license is not required?
- As regulatory focus increases, are there compliance policies and procedures in place to enable the Bitcoin company to react quickly, effectively and efficiently to new regulations?
- Does the Bitcoin company have an experienced compliance officer?
- Has the Bitcoin company conducted adequate due diligence on all parties who touch the flow of funds?
What Does This Mean to me?
Whether it is Bitcoin or another virtual currency, the potential exists to revolutionize international payments through a Bitcoin style payment or distribution system. For this to occur, regulators, financial institutions and businesses need to understand and accept the potential impact and join the dialog to develop strong banking relationships with Bitcoin companies that focus on complying with the law even in light of the current regulatory uncertainty.
This article was first published on BankDirector.com.