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.

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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