Obtaining a Bitcoin MSB Bank Account – The Importance of De-risking Your Business

 

This article is written by Zachary Owens. Twitter: @zaowens for questions and comments.

Your bitcoin exchange or ATM business is considered a Money Service Business (MSB). This label by the federal government brings along a certain stigma. Banking is the most common point of failure when it comes to operating any kind of bitcoin related business, especially when your branded as a money services business. Most traditional banks will not bank MSBs, as MSBs are considered ‘high risk’ to banks. This, coincidentally enough, is due to the bank’s very own BSA/AML related policies. You need to be upfront with banks about your business. You likely need to talk directly to bank compliance officers in order to even stand a chance of opening an account. Lying to the bank about your business activities is a terrible idea. Same goes for using an already existing business name and bank account to deposit your ATM cash. You will learn very quickly that banks frown upon large cash deposits. In some cases, banks will open accounts, pass your account through compliance, then still shut down your account months later after seeing large cash deposits. This is why is important to be upfront with the bank, and work directly with the compliance department. Nothing is worse than setting up an  ATM and closing it down 3 months later due to banking issues. This exact scenario is VERY COMMON for small ATM operators.

Erie Federal Credit Union closes bitcoin MSB account due to compliance risk factors.

Your first goal should be to try to locate banks that will open accounts for regular MSBs. Not all banks advertise they bank MSB accounts. It’s easiest to call around and ask banks if they open accounts for regular cash ATMs. Once you find banks willing to bank regular cash ATM operators, you should try to setup a meeting with, or email the banks compliance officer. The compliance officer at a bank is responsible for managing the bank’s risk. Speaking directly with a compliance officer means you are dealing directly with one of the main people that can authorize the opening of your account. 

What is risk? Just like your business, the bank is trying to reduce any fraud or money laundering that could take place. The bank wants to adequately identify you and your business to ensure it knows who its banking. Sound familiar? It should. These are the same steps you take to follow KYC/AML laws with your ATM. The bank is mainly concerned you are not using your KYC/AML based business to launder money anyways.

To convince the bank to open your MSB account, you need to be able to demonstrate your mechanisms for complying with FinCEN BSA/AML/KYC regulations. Demonstrate you have a working knowledge of how to prevent money laundering on your ATMs and the usage restrictions you put in place. Explain how your machine collects and stores identifiable information on your customers. Furthermore, explain cash limits placed on customers, and your reporting procedures for suspicious activity. Show the bank a copy of your AML policy. These are the fine details the compliance officer wants to see.

De-risking doesn’t stop there. The legal aspects of bitcoin are often a grey area the banks will consider risky. You need to operate in as few grey areas as possible. Make sure you have done your due diligence regarding money transmitter license for your state. This is something the compliance department at the bank will often want clarity on. Your business is already considered a money transmitter by the federal government, which is one form of risk the bank needs to manage. Making sure your business does not meet requirements for your state will remove another risk factor, making the bank more willing to work with you. How do you prove a license is not required? Explain yourself thoroughly in writing. In addition, hire a consultant or a lawyer to reaffirm your findings. The more detail in your work you can show, the better. It helps to reduce your risk factor.

Application of Money Transmitter Laws to Bitcoin in Colorado (PDF)
Colorado Division of Banking Regulatory Guidance for Cryptocurrency MTL Laws (PDF)

 

 

 

 

 

 

 

 

In conclusion, test yourself. Ask yourself harder questions than your bank will. Answer these questions for your bank (in writing) before they are able to ask them. Demonstrate knowledge, active measures, and over-compliance. Show the bank you go above, beyond, and are a fully legitimate business. Demonstrate your industry knowledge and show it off in full force.  Also, just because a bank denied your request to open account does not mean that bank will not be willing to work with you in the future. Be persistent, never give up.

Here are some example questions you should answer for yourself:

1)    How is transaction monitoring taking place?
2)    What is your policy in regards to Currency Transaction Reports?
3)    How does your business monitor for fraud? What are your internal controls?
4)    Do you engage in real time OFAC screening? How often are screens performed? Please provide the name of the third-party vendor that provides your OFAC screening.
5)    What is your process for verifying customer identity?
6)    Do you perform criminal background checks on your customers? Please provide the name of the third-party vendor that provides your criminal background checks.
7)    What is your account review process and how often is it performed?
8)    Do you engage in blockchain monitoring? What system are you utilizing for blockchain analysis?
9)    What is your policy in regards to SAR filing?
10)    Do you have a dedicated compliance officer in charge of overseeing your AML/KYC program? What training do they receive?
11)    What does your risk assessment process look like? What factors do you consider?
12)    Is there independent auditing of your KYC/AML program?

 

Personal Note: My bitcoin ATM business ended up finding a banking partner. It was a small-midsize bank that had originally showed interest in banking me, but ended up denying me the first time around. After de-risking my business, clearing up Colorado MTL laws, I emailed the compliance officer I was working with and she finally approved the account. The bank informed me they banked regular ATMs, and does not advertise it accepts MSBs.

 

 

This article is written by Zachary Owens. Twitter: @zaowens for questions and comments.

 

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