Banking Issues Continue While Surety Bond Underwriters Embrace MSBs

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Authored by: Brian Nelson, Bond Manager at Alpha Surety Brokerage

Why are MSBs are locked out of the traditional banking sector while at the same time surety bonds are becoming cheaper and underwriting requirements continue to loosen? I know I’m oversimplifying this a bit, but surety bond underwriters understand that claims on MSB bonds are typically caused by a breach in compliance. Naturally, banks understand the same. However, as banks continue to close MSB accounts, surety underwriters are issuing approvals on lower underwriting requirements and at premiums that have previously been reserved for only the top revenue companies. It used to be that new money transmitters, check cashers and prepaid access companies would pay at least 3% for their bonds if they could even qualify based on verification of substantial personal assets or substantial cash in the business bank account. Things have changed. Recently, a company with neither a large amount of cash in the bank or a strong personal financial statement for the owner, received an approval for 1.5% on a multi-million dollar aggregate bond need. According to the underwriters, the reason for the low quote was because competition for these types of bonds has increased significantly. (For a state-by-state list of bond amount requirements, click State by State Bonds.)

Wouldn’t it be nice if banks felt the same way about competition? MSBs around the country are dying to find banking partners that will treat them fairly. I recently spoke to an MSB about a potential partnership that would have brought them a substantial amount of new business. After my presentation, I was told that their bank wouldn’t allow for them to partner with other MSBs. I’m still confused by the comment because both entities involved in the partnership would have been licensed money transmitters. Since when does a partnership between two licensed companies create a compliance risk for banks?

Unfortunately, it is the poor, underserved and deprived populations that suffer the most when MSBs are cutoff from serving them. Organizations like the NMTA, NBPCA and others have been fighting the banking battle for years with little to no progress. We can only hope that newer industries like the digital currency and the electronic payments industries will bring their resources, connections and energy to the fight. Without them, I’m afraid we’ll be talking about the same banking issues for many more years.

If you know of any groups or efforts focused on the non-banking issue, please share details in the comments section.

Myth Busters: No Widespread Use of Bitcoin for Crime

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***The following is a Bloomberg article written by Bitcoin insider, Carter Dougherty, and re-posted with his permission.***

Get the article on Bloomberg.com here.

Treasury’s Cohen Sees No Widespread Use of Bitcoin for Crime (1)
2014-03-18 15:55:31.842 GMT

By Carter Dougherty and Greg Farrell

The U.S. government sees no evidence of “widespread” use of virtual currencies such as Bitcoin to evade sanctions or finance terrorism, the Treasury Department’s top official targeting money laundering said.

“Terrorists generally need ‘real’ currency, not virtual currency, to pay their expenses -– such as salaries, bribes, weapons, travel, and safe houses,’ David S. Cohen, the undersecretary for terrorism and financial intelligence.

‘‘The same is true for those seeking to evade sanctions,’’ Cohen said in a speech at the New York headquarters of Bloomberg News.

Governments around the world are grappling with how to classify or regulate virtual currencies such as Bitcoin. Authorities in Russia, China and Israel have sought to restrict the payment system, while Treasury Secretary Jacob J. Lew said in January the U.S. needed more time to assess the ‘‘phenomenon’’ to ensure it isn’t used for unlawful purposes.

Cohen rejected arguments that regulation would drive virtual currency innovation out of the U.S., saying ‘‘the opposite is true’’ in this new industry.

‘‘Financial transparency can help bring stability to the virtual currency market and security to its users and investors,’’ Cohen said. ‘‘And that is what we are trying to do through sensible, flexible and -– to use a word from the tech world -– scalable regulation.’’

At the same time, Cohen emphasized that the government would err on the side of squeezing innovation if necessary for law enforcement purposes.

Choosing Transparency

‘‘There may be situations where we need to choose between innovation and transparency,’’ Cohen said. ‘‘Let me be clear: When forced to choose between the two, we will err on the side of transparency.’’

Cohen said that some virtual currency companies haven’t registered with Treasury’s Financial Crimes Enforcement Network, a requirement established in March 2013, and aren’t following record keeping and reporting requirements.

‘‘Those that do not comply with these rules should understand that their actions will have consequences,” Cohen said.

The Treasury Department’s Bank Secrecy Act Advisory Group will include a member of the virtual-currency community to help make regulations “better informed and more effective,” Cohen said, without saying who it will be.

The department has urged industry leaders to devise ways to prevent criminal use of virtual currencies rather than develop technology that “further obscures financial trails,” he said.

Bitcoin Origins

Bitcoin, the most popular digital currency, emerged from a 2008 paper written by a programmer or group of programmers under the name Satoshi Nakamoto. It uses a public ledger to record transactions made under pseudonyms, an aspect of the system that has fed mistrust among law enforcement.

The price for Bitcoins soared in November, topping $1,000 for the first time, as merchants including Overstock.com began accepting the virtual currency and speculators anticipated broader use of digital money.

Prices dropped this year amid mounting U.S. prosecutions of Bitcoin-linked money laundering, concerns that governments would restrict the currency and market disruptions including hacker attacks on online exchanges.

Bitcoin prices declined about 1 percent today, and stood at $612.50 at 11:08 a.m. New York time, according to the CoinDesk Bitcoin Price Index.

‘Grossly Inefficient’

The decline was “likely” connected to the outage at the website Blockchain.info, a popular Bitcoin wallet provider, said Jonathan Levin, a co-founder of Coinometrics, a research firm in Oxford, U.K. He also said that digital currency markets are “grossly inefficient.”

Cohen said that the Treasury Department places “real value” on financial innovation such as digital currencies.

“Advancements in technology that allow entrepreneurs and businesses to innovate, grow and hire are crucial to our country’s long-term success,” Cohen said.

Cohen has served as undersecretary since 2011. He first joined the Treasury in 1999 and, while working for its general counsel, helped draft part of the Patriot Act that granted the regulator new tools to thwart money laundering and terrorist financing after the Sept. 11 attacks.

The Treasury’s office for terrorism and financial intelligence seeks to prevent criminal networks from using the U.S. financial system and to cut off funding for terrorists. It includes the Office of Foreign Assets Control that helps enforce sanctions on nations, such as Iran, that have a history of providing support to terrorist groups.

Accepting Applications

New York financial regulators also have been working on a response to Bitcoin. Benjamin Lawsky, the state’s superintendent of financial services, announced last week that his office is accepting applications to operate exchanges for Bitcoin and other digital currencies. He plans to propose a set of rules for virtual-currency firms by mid-year.

Last month’s collapse of Tokyo-based Bitcoin exchange Mt. Gox, in which some customers lost their holdings, shows the need for “robust standards for consumer protection, cyber security and anti-money laundering compliance,” Lawsky said.

Federal authorities have been targeting misuse. Last year, they shut down Silk Road, an online drug and weapons bazaar where Bitcoin was the preferred medium of exchange. In January, they arrested Charlie Shrem, a Bitcoin entrepreneur, on charges of money laundering. He has denied the allegations.

To contact the reporters on this story: Carter Dougherty in Washington at cdougherty6@bloomberg.net; Greg Farrell in New York at gregfarrell@bloomberg.net

To contact the editors responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net Anthony Gnoffo, Gregory Mott

NY Virtual Currency Announcement Misleads

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The excitement and enthusiasm of Digital Currency entrepreneurs was palatable after the recent announcement by Ben Lawsky, New York’s first Superintendent of Financial Services, that the state would begin accepting license applications by Digital Currency exchangers. However, less than 48 hours after Lawsky’s announcement, feelings of frustration have replaced the excitement. Bitcoiners are quickly learning that the announcement does not apply to the majority of companies in the space.

Why are Digital Currency industry members so upset and frustrated?

New York is only accepting applications from “pure” exchanges. That is to say, exchanges that do not offer any other services or products other than exchange services.

Based on that information, the heavily funded, well-known and respected Bitcoin companies like Coinbase, Circle, Kraken, itBit or BitStamp are not being allowed to submit applications to the state. And it’s not likely that smaller, less visible companies will submit money transmitter applications because of the surety bond requirement. The $500,000 surety bond, which is required to be submitted with the NY application, is not attainable for these companies.

The motives behind this announcement are somewhat suspect. Having such a narrow scope of possible applicants doesn’t make much sense. If Lawsky and his team in New York really want to protect consumers by issuing Digital Currency specific regulations, then they should encourage the big industry participants to submit applications, not lock them out. And on the subject of consumer protection, a singular focus on exchanges for consumer protection purposes is shortsighted and will be found lacking. New York will accomplish little with this current application acceptance strategy.

– Brian Nelson

Are Money Transmitters Risking Licenses By Partnering With Virtual Currency Operators?

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Since March of this year, when FinCEN released new guidelines requiring virtual currency operators to be licensed as money transmitters, the subject of compliance has been the main topic of conversation within the virtual currency world. Conferences devoted to federal and state regulations such as the Virtual Currency Compliance Conference “VC3” hosted by the NMTA two weeks ago are being held in order to connect and learn from regulators, traditional money transmitters and virtual currency operators. And although the efforts of conference organizers are valiant, one huge piece of the compliance puzzle is being overlooked; Surety Bonds.

The process of getting licensed and bonded nationally is onerous for emerging startups in the money transmitter space. For that reason, a number of traditional money transmitters have expanded their business models to include an agent program that allows virtual currency operators to “piggyback” off of their licenses, and by extension, their surety bonds. But there is a mounting problem with that business model. The surety bond carriers that are denying bond applications from virtual currency operators are the same carriers that are currently providing the bonds to the money transmitters offering agent programs to the virtual currency industry. Surety bond carriers are beginning to question their desire to continue providing bonds to money transmitters interested in opening their licenses and bonds to be piggybacked on by virtual currency operators.

A leading underwriter for a large surety bond carrier expressed his concern for the business model in a recent message where he points out that one misstep by an agent could be a money transmitter’s demise and easily cause a claim on one of the bonds. He goes on to say that he understands that they are only underwriting the money transmitter, but that they are ultimately relying on the principal’s ability to underwrite the agents. The pinnacle of his concerns is this; “They (traditional money transmitters) are getting into the Bitcoin arena, which is a class of business we are not comfortable with at the moment.”

It is yet to be seen if surety bond carriers will take action against traditional money transmitters that partner with virtual currency operators by cancelling their bonds and therefore rendering them unlicensed. However, we do know that bond carriers have the right to cancel a bond at renewal for whatever reason they deem appropriate. For example, virtual currency companies that have been issued a money transmitter bond in the past are now seeing those bonds being cancelled upon renewal due to the uncertainty of the virtual currency industry. Without the ability for companies to secure the necessary surety bonds, there is no hope for a legitimate virtual currency market.

The success of math-based currency relies on the efforts of advocates involved in each aspect of compliance. Alpha Surety is working hard to educate surety bond carriers on the virtual currency industry by representing both virtual currency operators and traditional money transmitters seeking to provide solutions to emerging technology companies.

The Gaping Void Between Traditional MSBs and Virtual Currency Operators

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There is a gaping void between traditional money transmitters and the virtual currency world! In order for virtual currency exchangers and administrators to comply with FinCEN and state regulations RIGHT NOW, they must build working partnerships with traditional money transmitters. Believe me, there is no other way for a virtual currency operator to get licensed and bonded nationally in any reasonable amount of time. Unfortunately, the process usually takes over a year. So…why aren’t more partnerships being developed where a virtual currency operator hooks up with a nationally licensed money transmitter as an agent?

What I’ve found is many money transmitters are interested in developing relationships with virtual currency operators, but they don’t know enough about the industry to jump in just yet. On the other hand, virtual currency operators know they need to find a partner, but don’t have the connections or the relationships with traditional money transmitters to make it happen.

I have been working with a number of organizations in preparing a “match-making” event where traditional money transmitters and virtual currency operators can meet face-to-face to discuss possible partnerships. This would give both sides an opportunity to learn from each other while building valuable relationships. Our hope is that by bringing both sides together, we will see more partnerships being built and thus the foundation of the virtual currency industry being strengthened.

Unfortunately, this type of event is not being valued by conference directors. I’ve contacted multiple conference directors who either don’t understand why this type of “match-making” is important or just don’t care to add additional value to a conference schedule that is already set.

So…that begs the question; would a “match-making” event be valuable to you, either as a traditional money transmitter or a virtual currency operator?

Authored by Brian Nelson

State of California Fires the First Shot at Bitcoin Operators

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It was only a matter of time before the most over-regulated state in the country got involved in Bitcoin regulation. A new article from PaymentsSource describes the attack launched against the Bitcoin Foundation by regulators from the state of California. Interestingly enough, the Bitcoin Foundation should in no way be considered a money transmitter. Could it be that California regulators have delivered the cease and desist order to the Bitcoin Foundation simply to wrangle other Bitcoin operators in one fell swoop?

Read the full story HERE.

bitcoin-foundation-california

Why We Need to Know Our Customers

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I was reading a fascinating true fraudulent situation on ‘U.S Charges Eight with Multi Million-Dollar cybercrime’ dated June 12, 2013 in CIO Magazine.  Essentially hackers were able to gain access into the accounts of various banks and organizations which included the U.S Military’s Defense Finance and Accounting Service.  In addition, the hackers allegedly submitted fraudulent tax returns to the U.S Internal Revenue Service seeking refunds.

The funds received from these institutions were then directed on to pre-paid debit cards and various bank accounts.  In the case of the pre-paid debit cards, money was obtained from ATM withdrawals and purchases which were converted into cash.  Cash was then deposited into bank accounts in amounts below reportable thresholds limits.

Apart from reading this ingenious scam operation, I could not help but think of the consequences to our legitimate business.  Once the funds were in bank accounts and even the pre-paid debit cards, it could have easily been used to purchase products or services offered by our institutions.  And even applying the standard Know Your Customer rules when conducting business with a new client, I can imagine that there is a possibility of such activity still passing through our business unwittingly.

We would then only be aware of a problem when the authorities made their investigation.   And at this point, the scenario becomes a regulatory nightmare for any legitimate business which would have accepted these transactions.   Apart from possible financial losses we would then be faced with a regulatory issue of how we could have allowed this transaction to be passed through our organization.

The end result is that business in general is tough as it is.  But with sophisticated cybercrime, we now have additional financial and regulatory problems.

Allan Ramlall

Not a Big Deal to Follow the Money Transmission Rules

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Allan-Ramlall-NMTAI would like to make some observations after reading the article ‘Virtual Currencies Draw State Scrutiny’ by Robin Sidel and Andrew Johnson in the Wall Street Journal.  The newly virtual currency exchanges must have developed a business plan specifying in detail the type of financial service which they planned to provide.  In addition, as in many cases these firms could have used attorneys to legally incorporate their businesses.   Whether it should have been the relevant attorneys, their bank officer who opened their bank accounts or the owners – it appears that the money transfer experts were not consulted.

Those of us in Money Transfer Compliance would have easily recognized that a money transfer license would have been necessary for the Bitcoin type of business module.  And even if the activity was in a ‘grey area’ – a simple call to the U.S regulators would have solved the issue.  In any case, one cannot go back in time but must deal with current reality – which is a Money Transfer license is required for a given relevant state in the U.S.A.   Yes – it is a bit cumbersome to obtain a license state by state since we do not have in place one National Money Transfer license covering the entire United States.

However, to attain a state Money Transfer License is relatively painless if you consult with the Money Transfer experts.  We can apply for one or multiple state licenses at a given time for a reasonable price and not a huge fortune.  And you do not need an attorney to execute this task.  Leave it to the experts who have the experience in this field.

And please – as long as the virtual currency exchanges have an objective of only conducting legitimate business then they should welcome the anti-money laundering requirements which come along with a state Money Transfer License.  Again the money transfer regulatory experts can assist you to set up policies, procedures and controls to mitigate the infiltration of the criminal elements in your company operations.

NMTA Logo

Yes – you do need surety bonds for the Money Transfer licenses in the various states.  But do not be afraid of the numbers – such as having to obtain a surety bond of $300,000 to $2 million.  Again the money transfer compliance experts can have the surety bond specialists quote you the premiums which you will need to pay – and I assure you that if your company has a good business, those premiums can be quite satisfactory.

So please my friends – do not be afraid.  Be brave – especially if you have confidence in your product and service and wish to conduct only legitimate business.   The government regulators will work with you as long as you follow the rules.

-Allan Ramlall

 

Surety Bond FAQ’s for Cryptocurrency Exchangers and Administrators

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Since the Bitcoin 2013 conference, I have been bombarded with questions regarding surety bonds.  In response to the many inquiries, I decided it would be best to provide answers to the most common questions in a blog post.  If you still have questions after reviewing the post, please contact me and I’d be happy to answer them.

Q. What is a money transmitter?

A. A Money Transmitter is a business that engages in receiving money from one customer or business and transmitting it to another customer or business both within and outside the U.S.  The methods of transmission include electronic transfers, wire transfers, and payment instruments like traveler’s checks.

Q. What is a surety bond?

A. A Surety Bond is a third party guarantee that an individual or a company will fulfill their obligations.  The surety bond is a three party agreement between the principal (the person or company requesting the bond), the obligee (the beneficiary on the bond), and the surety bond company (the third party guarantor that the Principal will perform their obligations).

Q. What is a Money Transmitter Surety Bond?

A. A Money Transmitter Surety Bond is a license and permit bond required by certain states.  A license and permit surety bond is a broad category of surety bonding that includes all types of surety bonds required by an obligee in order for the principal to obtain a license for performing some specific type of work within a specific state.

Q. What types of companies in the Cryptocurrency community are required to be licensed as a money transmitter?

A. According to the statutes and regulations released by FinCEN on March 18, 2013 regarding virtual currencies, administrators and exchangers of Bitcoin will be treated as money transmitters.

“An administrator or exchanger that (1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason is a money transmitter under FinCEN’s regulations, unless a limitation to or exemption from the definition applies to the person.

The definition of a money transmitter does not differentiate between real currencies and convertible virtual currencies.  Accepting and transmitting anything of value that substitutes for currency makes a person a money transmitter under the regulations implementing the BSA.”

Q. What is the process to get qualified for surety bonds?

A. Starting the surety bonding process begins with the company completing a surety bond application.  A surety bond broker will then use the information on the application along with personal credit history of the company ownership to evaluate the risk of default.

While some smaller bonds may be underwritten and approved based solely on the personal credit of the business owners, companies needing several bonds, such as Bitcoin exchangers, will be asked to provide one or more years of company financial statements and/or personal balance sheets on the company’s owners in order to further assist the review of the business.

Once approved, the surety bond(s) will be executed and the principal will be required to pay the premium.  Next, you will need to sign the bond and send it to the appropriate state department.

Q. How long will it take to get approved for the surety bonds? 

A. After submitting the required information and documentation, an initial review will be conducted by a surety bond company underwriter.  Based on the results of the initial review, the surety bonds will either be approved or you will be asked to submit supporting documentation to assist in the underwriting process.  In all, you can expect to receive a definitive answer from the underwriter in one to two weeks if all requested documents are submitted in a timely manner.  Please note that state approval of your business license will take considerably longer.

Q. Do we need to be licensed and bonded in all 50 states?

A. You are only required to be licensed and bonded in the states where your customers reside.  With that being said, the business of a Cryptocurrency exchanger or administrator is primarily transacted online where customers access the business from all over the world. Unless you can prove that you don’t have customers in a given state, you will be required to be licensed in all 50 states and bonded in the 48 states that currently require a bond. (47 states plus Washington D.C.)

Q. What is the total amount of surety bonds we’ll be required to have?

A. Surety bond amounts are set by each individual state.  Some states have a statutory or set bond requirement while other states have a fluctuating bond requirement.  States with a fluctuating bond requirement start with a minimum bond amount that will increase and fluctuate yearly based on your volume of transactions, number of “agents” or number of physical locations.  Needless to say, the minimum total amount of surety bonds you’ll need to be licensed nationwide is approximately $7,000,000.

Q. How much do surety bonds cost?

A. The cost of a surety bond is called the “surety bond premium”.  Similar to credit card rates, the surety bond premium is based on available information, including business and/or personal finances.  Because of this, not every company receives the same rate even though they may have the same type of surety bond.

Standard money transmitter bond premiums range from 1% – 3% of the bond amount.  However, the premium can be much higher if the company and/or company owner’s finances are not strong enough to support the lower rate.  Collateral can also be required if deemed necessary.

Q. Is there any way around getting licensed and bonded as a money transmitter?

A. Yes.  A very limited number of nationally licensed money transmitters allow other companies to “piggyback” off their licenses for a fee. They may also require you to submit a “financial guarantee” surety bond as a small form of protection against any wrong doing your company may get involved in.  However, please note that both the current money transmitter and your company will share each other’s risk in this situation.  It is always best to stand on your own if possible.

Q. Why should we get licensed and bonded as a money transmitter right now?

A. No Cryptocurrency exchange or administrator wants to find themselves in the position multiple companies like Mt. Gox are in.  The state regulators and the Feds have shown that they will take action based on the guidelines released by FinCEN if they deem necessary.  Also, although only the state of Texas has officially adopted the FinCEN guidelines, it is only a matter of time before every state follows their lead.  The companies that proactively get licensed and bonded as money transmitters in all applicable states will be in compliance from the start.  Business will run as usual for them while the rest of the industry is playing cat and mouse with the Feds and catch up with the states.

Q. What should we look for in selecting a surety bond company?

A. Not all surety bond companies are alike.  Cryptocurrency exchangers and administrators don’t have time to educate their surety company on the industry.  You should only work with a surety bond company that has substantial experience in the money transmitter industry and also understands Cryptocurrency.

It is also important to find a broker well versed in the money transmitter industry as well as the Cryptocurrency community.  The broker will approach one or more surety bond companies on your behalf to get the best terms possible.

Brian Nelson, MSB Surety Bond Specialist

http://www.linkedin.com/in/briannelson36

bnelson@alphasurety.com

FinCEN to Bitcoin Administrators & Exchangers – You are Money Transmitters

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According to the statutes and regulations released by FinCEN on March 18, 2013 regarding virtual currencies, administrators and exchangers of Bitcoin will be treated as money transmitters.

An administrator or exchanger that (1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason is a money transmitter under FinCEN’s regulations, unless a limitation to or exemption from the definition applies to the person.

The definition of a money transmitter does not differentiate between real currencies and convertible virtual currencies. Accepting and transmitting anything of value that substitutes for currency makes a person a money transmitter under the regulations implementing the BSA.

Bitcoin

What does it mean to be classified as a money transmitter in respect to surety bonds?

Although money transmitters are regulated at the federal level, surety bond requirements are set by each individual state. The majority of US states require a company licensed as a money transmitter to post a surety bond as part of the state licensing process. Bond amounts range from $25,000 to $2,000,000+ based on a statutory or variable amount set by the state’s regulators.

A nationally licensed money transmitter is required to post approximately $7,000,000 in total surety bonds. At a premium cost of 1-2% of the aggregate total, Bitcoin administrators and exchangers with clients on a national scale will pay $70,000 – $140,000 for their surety bonds and the opportunity to be in business.

Since Bitcoin is a virtual currency, it would be extremely difficult to operate on anything other than a national scale. Therefore, any administrator or exchanger that is unable to qualify or pay for the $7,000,000 in surety bonds will be forced to close their doors or face legal action.

The question is, what will the impact be on the Bitcoin market as the number of administrators and exchangers decrease due to new regulations?

Please share your thoughts in the comments section.