Banking Issues Continue While Surety Bond Underwriters Embrace MSBs

MSB Talk 4

bnelson

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.

Don’t Bite the Hand that Feeds Millions

MSB Talk 4

Amidst all of the regulatory oversight and compliance scrutiny MSBs are faced with in the United States, it is easy to lose sight of how noble our cause is. Many of the world’s nations rely on money remittances to support their citizens. Our job as industry participants is to provide our niche client base with simple and affordable ways to support the world economy through international money transfers. It doesn’t take long to see the value US money transmitters bring to the underdeveloped nations after spending time within their borders.

A few weeks ago I had the opportunity to visit an underdeveloped region on a trip to setup correspondent partnerships and bank accounts for a money remittance company I’m involved in. I couldn’t have been more impressed by the region and their willingness to work with us. I was also astounded by the genuine gratitude the business and government leaders showed us after discussing our business plan.

Never before had they been approached by a money transmitter focused solely on supporting and growing their economy. Both banks and government entities welcomed us with open arms. Not only were they excited about our partnership, but they wanted to know how they could further help us reach their citizens. Make no mistake, there are other US money transmitters sending funds into their countries, but it was apparent that the perception of these mega companies was that they were extracting more value than providing. It takes more than a capitalistic desire to make money in order to make a positive difference in the lives of others and our new friends saw the difference immediately.

The highlight of the trip was receiving an invitation to present our business at an upcoming banking and economic development association conference for the region. I know my story is not unique, as many of you launched your businesses with the purpose of serving your people, but this experience opened my eyes to the positive impact our industry is making throughout the world. Regulatory, compliance and banking concerns are not going away, but at least we can take pleasure in the service we are providing millions of people across the globe.

~ Brian Nelson

NMTA Logo

As a quick plug, I’m the event coordinator for the upcoming Virtual Currency Compliance Conference (VC3 2014) being hosted by the NMTA in New York on August 13th. We’d love to see you there. We’ll have the event page up shortly on http://www.nmta.us

NY Virtual Currency Announcement Misleads

MSB Talk 4

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

The Gaping Void Between Traditional MSBs and Virtual Currency Operators

MSB Talk 4

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

Not a Big Deal to Follow the Money Transmission Rules

MSB Talk 4

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

 

We Are NOT Liberty Reserve

MSB Talk 4

I am sure that you all have read the numerous articles and news accounts of the $6 billion laundered through Liberty Reserve.  My intention is to look at various aspects of the Liberty Reserve case which all of our fellow colleagues in the foreign exchange, precious metals and legitimate money transfer business would never implement.   We must not allow anyone to link our totally transparent business activities with an outfit such as Liberty Reserve.

First of all, our fellow business entities operate within the confines of the U.S regulatory system.   Thus, many of us are registered with FinCEN as a MSB or obtaining a relevant State Money Transfer License.  Others would be registered appropriately in their various industry associations.   Liberty Reserve was blatantly conducting money transfer business and did not possess any such appropriate state licenses.  Without this license, with no regulatory oversight – who knows what due diligence if any was conducted with their customers and trading counterparties.

Second, with the mentioning of due diligence, it appears that Liberty Reserve accepted customers with the basic requirements of an e-mail address, a name, address and date of birth.  But what was not required, it seems was any verification of the customer’s identity.   What I am sure of – is that all of our upstanding fellow financial institutions have a strong Know Your Customer protocol prior to accepting anyone as a customer.  It is simply not worth the reputation risk of linking our institutions with criminal elements.

Third and here it becomes a bit confusing.  From the New York Times Article on May 29, 2013 ‘U.S Says Currency Exchange Was Online Hub for Laundering of $6 Billion’ customers did not directly fund Liberty Reserve. In fact the account holder would direct his or her regulated bank to transfer U.S Dollars to a Third Party Exchanger which was an unlicensed money-transmitting business located in Russia, Nigeria and Vietnam.  Then that Exchanger would then convert the money into digital or virtual funds for deposit into the holder’s Liberty Reserve account.

liberty-reserve1

It is here where I am positive that no such payment policy of ours even resembles that of Liberty Reserve.  We would require our accepted and approved customer to directly pay our institution’s account at a regulated bank in the U.S.  Not to have this simple requirement would mean there is no transparency.  And what I cannot comprehend is why the legitimate customers as opposed to the criminals would even conduct such a questionable payment process.  Would you or I just arbitrarily wire funds to an unknown entity in all places such as Russia, Vietnam and especially Nigeria!  And I would be curious to know what type of ‘due diligence’ were the regulated U.S Banks conducting when wiring funds to ‘questionable’ companies in High Risk Compliance countries.

I have mentioned these differences because I am hoping that the Liberty Reserve fiasco is not going to affect us in any way. I have no idea of what the fall out will be from this situation as it affects the U.S Banking System.  We certainly do not want the banks in the U.S to have any additional fears of dealing with legitimate non-bank financial institutions which conduct business with the general public.  And we have to disassociate ourselves with entities such as Liberty Reserve so that the legitimate public can trust dealing with us.

-Allan Ramlall

Surety Bond FAQ’s for Cryptocurrency Exchangers and Administrators

MSB Talk 4

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

MSB Talk 4

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.