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“Is it safe?” Banking in 2014

Szell:  Is it safe?
Babe:  I don’t know what you mean. I can’t tell you something’s safe or not, unless I know specifically what you’re talking about.
Szell:  Is it safe?
Babe: Yes, it’s safe, it’s very safe, it’s so safe you wouldn’t believe it.
Szell:  Is it safe?
Babe:  No. It’s not safe, it’s… very dangerous, be careful.

In the 1976 movie Marathon Man, Babe (Dustin Hoffman) is held down while Nazi war criminal Szell (Laurence Olivier) drills Babe’s teeth without anesthetic, trying to learn if it is safe to sell a cache of diamonds stolen from concentration camp victims.  Babe has no idea what Szell was asking about so has no information to disclose, even under torture.

After a decade of painful regulatory examinations without anesthetic, bankers are now asking the same question from the perspective of the tortured.  Is it safe to do business again?  As in Marathon Man, whether it is safe depends in part on what “it” means – what the proposed business is and who the customer is.  It also depends on the bank’s systems and infrastructure to manage the risk.

Given the changing legal and liability landscape, and changing expectations of examiners, bankers are uncertain about the risks of engaging in many types of business.  Some of the areas of uncertainty include providing banking services to third party payment processors, payday lenders, or money services businesses.  Other bankers are wondering about banking services for legal marijuana retailers, or their clients taking courses for forex, or buyers, sellers, or processors of virtual currencies.  Some bankers are even hesitant to return to mortgage lending in light of all of the new regulations and regulatory scrutiny.

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Should Your Bank Do Business with Bitcoin?

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”.

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