No Banking, No Bitcoin


[TBT + ICYMI. When I published this exactly three years ago last week, the “denial of services” issue was only known to those of us working in Money Services Businesses. Renamed as “derisking,” it has now become a global phenomenon that is affecting both and non-banks, and has no end in sight.]

Last Friday’s news that the Internet Archive Federal Credit Union (IAFCU) had shut down Tradehill’s account must have sent chills down the spine of every virtual entrepreneur.  If it didn’t, it should. The IAFCU was supposed to be one of the few, if not the only, -friendly financial institution in the U.S. rescuing virtual currency exchangers from ‘banking oblivion’.  At this point, we can only speculate about the true causes of this unfortunate situation, and we certainly hope it gets resolved favorably, promptly and permanently.

Let’s hope it’s another case of entrepreneurial immaturity, as that would be the lesser evil compared to other potentially more devastating ones.  However, with all due respect to the parties involved in this particular case, there is, in general, a fine line between immaturity and stupidity; one that cannot be ignored in a nascent industry that is riddled with risks, and in which a few bad apples could set the entire industry basket back by years.  My point is: Are convertible virtual currency exchangers doing their homework?

News flash 1 to virtual currency exchangers: you are financial institutions!

Being a financial institution requires a heightened degree of governance –organization, discipline and control– as well as excellent stakeholder communications.  Even if exchangers choose to partner with a licensed financial institution rather than to obtain their own licenses, a famously daunting and onerous process, they have to remember two things: (1) they still are financial institutions in the eyes of the government, which means they will need to comply with most federal AML regulations, and (2) by extending their licenses to them, their principal partners will be taking on additional risks which, by virtue of the halo effect, could have repercussions in their own existing operations and banking relationships.

In today’s environment, where even non-financial accounts are being closed, how do you think an existing master account depositary institution will react when they find out that their corporate client will be partnering with a Bitcoin exchange?

No Compliance, No Banking

This corollary to the main title has been a well-known necessary, yet not sufficient, condition in the money transmitter industry for a long time.

News flash 2 to virtual currency exchangers: There is a strong correlation –and even causality– between being a money transmitter and being unable to obtain and maintain a bank account.

Having opened, been denied, maintained, and lost dozens of bank accounts in dozens of countries within several money services businesses over the past decade, this is what it all boils down to: No compliance, no banking; no banking, no business.  I know that many in the space would prefer things to be different, but TODAY these are the rules of the game.

When FinCEN officially declared on March 18, 2013 that certain ‘convertible virtual currency’ operators were money transmitters, crypto-preneurs fitting this definition had to add the following two items to their long list of problems to be solved:

  1. How to legally operate in or service citizens of the United States, which has an archaic, convoluted licensing regime
  2. How to build formally and substantially sound internal policies, procedures and controls (collectively, programs) to comply with applicable regulations of various kinds, including anti-money laundering, anti-terrorist financing, privacy and consumer protection

Applying for and expecting to be granted the luxury to maintain a bank account before completing both of the above is naïve and unrealistic.  And it gets worse, even when exchangers have checked the boxes on the two items above, a third condition will be required: the revenue must be large enough to outweigh the bank’s internal risk management costs.  I’m sorry if I’ve burst anyone’s bubble, but that has been the story of our lives in the money transmitter industry for a long time.

Tough Choices

As if dealing with the myriad risks and adoption challenges inherent in the itself was not enough, ‘convertible virtual currency’ operators have been confronted with decisions so tough that many may soon be out of business –either because they chose to ignore the FinCEN guidance and its attendant obligations, or because they chose to take them as seriously as expected.  The former would get them in trouble with the law.  The latter, too deep in the red.

The good news is that, in spite of the tight budgets and the limited options, it is possible to obtain and maintain bank accounts in the United States.  It just requires a lot of hard work, and it all starts with a fundamental cornerstone: a world-class risk management and compliance program.

This challenge can be approached in various ways.  There are a lot of smart and experienced lawyers that can help understand the details of what must be done.  In general, however, they will not be able to help much with how to make it all work within the unique confines of a company, operation and product.  In my experience, nobody better to build a solid, sustainable, risk management program than one’s own internal engineers and product owners with the full support of an enlightened leadership.

What are you waiting for, crypto-preneurs?  Are the stakes not high enough?

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