Operating as a Money Service Business – The Bitcoin Banking Burden in the United States

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

For the average person involved in bitcoin, buying and selling bitcoin seems frictionless. Login to your favorite exchange, link your bank account or credit card, then buy or sell. It’s that simple. However, behind the curtain of your simplified and user friendly experience with your bitcoin exchange exists a complex world of financial regulation and banking practices that are rarely discussed in public. I’m writing today to shed light upon this dark and convoluted system that is stifling small, law abiding, bitcoin startups. In order for me to explain some of the situations that so many individuals and businesses have experienced, I need to define some terminology and the regulators that are involved. Its enough to put the average person to sleep, but if you’re in the bitcoin business industry, or want to be, this is some important stuff.

Bitcoin exchange businesses in the United States are regulated by the Financial Crimes Enforcement Network

In 1970 congress passed the Banking Secrecy Act (BSA), a law requiring financial institutions in the United States to assist government agencies to help detect and prevent money laundering. Specifically, the government is concerned about large cash transactions totaling over $10,000. The agency in charge of the reporting is the Financial Crimes Enforcement Network (FinCEN), a branch of the United States Department of Treasury. FinCEN’s job is to collect and analyze financial reports they receive to combat domestic and international money laundering, terrorist financing, and other financial crimes. On March 18, 2013 FinCEN issued a statement declaring any business that acts as an ‘administrator or exchanger’ that accepts and transmits a virtual currency is a money transmitter. A money transmitter by FinCEN’s own definition is a person (or business) that provides a service that engages in a ‘transfer of funds’, or substitutes funds in another form to be transmitted or delivered from one person to another. Since FinCEN now declares businesses that buy/sell bitcoin as a money transmitter, it effectively groups businesses into what is referred to as a Money Services Business (MSB). MSB’s include money transmitters, check cashing, dealers in foreign currency exchange, or other money related instruments.

All Money Services Businesses (MSB) are required by law to register with the Financial Crimes Enforcement Network (FinCEN). When the company registers, they opt-in to federal regulations under FinCEN. Regulations require the business to file a currency transaction report (CTR) for deposits or sales totaling over $10,000 from a single customer, or a suspicious activity report (SAR)  if the transaction or customer appear to be suspicious in anyway. ‘Structuring‘ is a term used to describe arranging deposits/sales in manner that would avoid reporting and is considered suspicious. Also, regulations require the business to draft a written anti-money laundering (AML) policy. The drafted policy typically states how the business will review itself to make sure that its own policy is followed. For smaller businesses this usually involves hiring an accounting firm to perform an annual audit. These regulations and reporting requirements are why bitcoin exchanges place limits on customer transactions for a daily/weekly amount.

Knowing the information above, we can now discuss risk. Banks try avoid risky businesses at all costs. Most of us in business also try to minimize risk, or at least our exposure to it, as mush as possible to remain profitable. Due to FinCEN and other financial regulations, banks tend to de-risk themselves whenever possible, which includes blanket account closures on certain account types they deem high risk. A major target for these wholesale termination policies are MSBs. Many banks, instead of updating their compliance procedures to manage higher risk accounts, simply choose to terminate them, or deny them an account instead. Typical reasons given by banks for denying businesses an account are a combination of the following:

  • Business is high risk
  • Bank does not bank MSBs (per policy)
  • Business’s primary income is from MSB related activity (over 50%)
  • “Intense” regulatory compliance requirements
  • Bank too small to meet regulatory requirements for account
  • Will not bank bitcoin related businesses
(See images included below for real-life examples from above)

As you can see, most excuses issued from the banks revolve around risk and compliance. Banks simply apply their non-MSB policy or state compliance related problems as their excuse to not bank MSBs, which includes bitcoin related businesses. Some banks have detailed questionnaires and willingly accept some MSBs based on their bank policies. In the case of Huntington bank, question number 11 on their MSB questionnaire asks if the business deals with or exchanges bitcoin. Regardless of whether the account was denied because the business is “high risk”, conducted over 50% of business as MSB, or just bitcoin related in general, the bank still declined to open the business account. Believe it or not, this type of conduct is frown upon by FinCEN, the banks financial regulator. In an article released by FinCEN dated November 10, 2014 (available here), FinCEN states that they do not support the “wholesale termination of MSB accounts without regard to the risks presented or the bank’s ability to manage the risk”. The article further states that MSB risk tolerance should be considered on an account-by-account basis. Banks are simply ignoring the aforementioned  guidance from FinCEN in favor of de-risking accounts. Furthermore, FinCEN also states that “[The bank] should understand the MSB’s business model and the general nature of the MSB’s own customer base, but it does not need to know the MSB’s individual customers to comply with the Bank Secrecy Act. This is no different from requirements applicable to any other business customer”.

With all of the drama taking place trying to open a bitcoin related MSB account, you would assume somewhere in all the regulations that banks are required to follow, there would be a consumer protection regulation that protects your right to open a bank account against such unfair reasoning. Especially when we established above that the banks have even been issued guidance from regulators that opening these types of accounts is completely legal. Opening complaints with the Consumer Financial Protection Bureau didn’t make any of the banks I contacted reconsider their policy decisions. In fact, they plainly stated in writing the same excuses risk related excuses. In a letter received after filing a complaint with the Federal Reserve Bank of Kansas City, the Federal Reserve stated “we did not find that the bank violated the federal consumer protection laws and regulations under our purview when it denied your request for a business checking account”.

After being denied by every bank and credit union in my local area and most of Pennsylvania, I proceeded to look for out of state banks to partner with. This is where things start to get even more complicated. Because you are banking in another state, (based on my experience) your business LLC likely needs a “foreign entity” filing in the state you’re looking to bank in. Since my business already had a foreign entity filing and was able to business in Colorado, I started there. Unfortunately, most banks still outright declined to open a business account. Even some MSB friendly banks declined opening accounts based on the fact the business was bitcoin related.

Armored trucks can transport cash between commercial cash vaults

Some of you might be have some questions pertaining to banks in other states. Especially bitcoin ATM operators that handle cash. Obviously bitcoin businesses that handle bank ACH transfers and credit cards instead of cash have it a lot easier when banking out of state because everything is digital. However, cash operators have to make a cash deposit. This is where banking gets even more complicated than it already is. This is where commercial cash vaults come into play. From my understanding, the business would hire an armored truck company to pickup cash either from your office or serviced directly from your bitcoin machine, and make a deposit into a commercial cash vault. Supposedly once in a cash vault, its either delivered to your bank via a withdrawal from a cash vault near your bank, or its digitally added to your account once in the vault. This is how a long distance cash deposit is made into your bank that is located in another state. Just when you thought this situation could not get any worse, you will find that some armored trucks will deny you an account with their company because your business is bitcoin related. Both Brinks and Loomis armored trucks will deny you service. One cash carrier that will provide you with service is GardaWorld (garda.com). A support representative will usually forward you to a sales rep that already has experience setting up bitcoin related accounts.

After searching the internet and investing many countless hours of research and chasing down leads, I was able to find a only a couple banks that are just semi-willing to entertain opening a bitcoin related MSB account. One is Silvergate Bank located in San Diego. Apparently Silvergate Bank is partnered with Xapo in some way, but will only open accounts for businesses that already have multiple millions of dollars in assets. Metropolitan Commercial Bank located in New York City, is somehow partnered with Coinbase, though this ended up being a dead end, with no emails returned. A talk with a lower level business account representative was mostly concerned about how many millions of dollars of assets my business had. Clearly not recommended for small business owners.  Finally, Cross River Bank located in New Jersey. Cross River Bank is also somehow involved with Coinbase and is willing to work with bitcoin related exchanges and businesses. However, Cross River Bank will not bank bitcoin ATMs.

In conclusion, business banking is a choke point for bitcoin startups. The inability to legally move US dollar from one place to another creates a massive burden on businesses. Coincidentally the problem being describing in this article is the exact reason for bitcoin’s existence.  The free flow of value from one spot to another that is completely friction-less. When you download a bitcoin wallet you can’t be denied by the bitcoin network because of a “risk tolerance policy” or million dollar asset requirements. I was hoping to end this article on a positive note. However I am still in search of a bank that will open an account for my business and its single bitcoin ATM. The experience has weakened my view on the United States banking system, but strengthened my resolve on bitcoin. It has reminded me how truly powerful bitcoin actually is and the massive potential it has. As for fixing the choke point with banks, I’m not sure where to start. Regulations are likely political. We would need to elect officials that would either remove regulations or create more regulations to fix the problem. Maybe the banks could be sued? Maybe this falls under anti-trust laws? Could a large group of bitcoin companies start a bank or credit union that’s bitcoin friendly? Those are some things that came to mind while writing this article. Government is a slow moving bloated machine. So are banks. If any change is coming to these regulations or policies, its likely going to be very slow and in the distant future.

 

Further reading, research, and article sources:

This list will be regularly updated. (last updated 4/26/18)

Bank Yes No Details
Alpine Bank X
ANB Bank X
Bank of the West X
Citizens Bank X
CNB Bank X
Community Banks of Colorado X
Cross River Bank X Banks bitcoin businesses and exchanges. Will not bank ATM operators.
Erie Federal Credit Union X
First National Bank X
Huntington Bank X Banks MSBs, but will not bank bitcoin related businesses.
KeyBank X
Marquette Savings Bank X
Metropolitan Commercial Bank X Banks Coinbase. Won’t open accounts for business assets under 2 million dollars.
Northwest Bank X
PNC Bank X
Silvergate Bank X
Banks ATMs & Exchanges. Need to be an established multimillion dollar businees to open account.
Timberline Bank X
US Bank X
Vectra Bank X Banks MSBs, but will not bank bitcoin related businesses.
Wells Fargo X No bitcoin accounts

 

 

https://en.wikipedia.org/wiki/Bank_Secrecy_Act

https://en.wikipedia.org/wiki/Financial_Crimes_Enforcement_Network

https://www.irs.gov/businesses/small-businesses-self-employed/money-services-business-msb-information-center

https://www.fincen.gov/sites/default/files/shared/FIN-2013-G001.pdf (FinCEN Virtual Currency Money Transmitter Statement)

https://en.wikipedia.org/wiki/Money_services_business

http://files.acams.org/pdfs/2016/Blanket-De-Risking-of-Money-Service.pdf

https://www.fincen.gov/sites/default/files/news_release/20141110.pdf

 

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

 

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