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.

Don’t Bite the Hand that Feeds Millions

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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

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

The Future of Money Remittance

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Update: Carter Dougherty released a great article for Bloomberg this morning that better articulates my point. 

The protocol of Bitcoin and other digital currencies provide perfect platforms to disrupt the money transfer industry. It’s no secret that remitting money around the world can be a costly and often times lengthy process. The current financial system requires money transmitters to use antiquated procedures that include multiple touch points.

A Personal Story

I spent 2 years living in the Dominican Republic. While living in the DR I regularly received money from family in the US. Because I was in the country on a service mission, I did not have a personal bank account which made receiving funds very difficult. At the beginning, my family used traditional money transmitters in the US. They would wire money to the company in the US and then the company would use an agent in the DR to issue me the funds. Everything seemed to work smoothly to my family, but to me the process was difficult and costly. It took 3-4 days from the time the transfer was initiated in the US for me to receive the funds and I typically only received 80-90% of the original transferred value.

Things haven’t changed much since my time in the DR, but thanks to digital currency protocols, FinTech entrepreneurs are beginning to address the long standing issues of money transmission. Using a digital currency protocol to transmit funds is a less expensive and faster solution. Transfers made on the Bitcoin network for instance can be done for less than 1% and can be settled in less 15 minutes.

An Example

In a December 2013 article published by Coindesk, Coincove, a California based company, is featured as the poster child for digital currency based money transmitters. Coincove uses the Localbitcoins platform to make remittance easier in Latin America. However, the Localbitcoins platform is built on an in-person marketplace and although it is substantial and growing at a rapid pace, digital currency money transmitters must seek a better long-term solution before they can effectively support the billions of dollars remitted annually.

Conclusion

We are in the infancy stages of digital currencies so we can expect to see major improvements in the digital currency money transmitter space in the coming months and years. Traditional money transmitters should take notice now and begin developing a strategy to leverage digital currency protocols.

If you’re interested in seeing an example, I suggest looking into Ripple. Please let us know of other examples in the comments section.

Full Disclosure: I am not associated with or receive payment from Coincove or Ripple in any way. 

Author, Brian Nelson

IMTC Conference Review – Industry Disruption: New Payment Protocols

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Mohr World Consulting along with the NMTA held another great conference for money transmitters in Miami Florida last week. The IMTC Miami conference has become the world’s largest conference dedicated to the money transfer industry and continues to grow year over year. It was great to see old friends and new faces as we all work together in building a more compliant and accepted industry throughout the world.

My main take away: New technologies are beginning to disrupt the money transfer industry.

Bitcoin

Although they are still in their infancy, protocols such as the Bitcoin protocol and Ripple are starting to compete with Swift as a transfer settlement tool. The new technologies are making money transfers easier, cheaper and more secure. However, it is apparent that these technologies still have a long road to travel before they have the traction and volume to make a big impact on the industry.

Traditional money transfer companies are hesitant to make any changes with their operations because of the potential compliance issues associated with using the new protocols. But…that will quickly change if companies like Ripple succeed in landing a couple big name money transmitters.

It was apparent during the Virtual Currency panel, that traditional money transmitters are still not convinced of the power of Digital Currencies. However, a number of individuals in the room later expressed interest in either partnering with Bitcoin companies or using a service that would provide a better settlement tool using the Bitcoin protocol. Now that the ball is rolling, it’s only a matter of time before the industry adopts new protocols to facilitate money remittances.

All in all, I truly enjoyed the conference and look forward to reconnecting with everyone again soon.

– 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 Virtual Currency Compliance Conference (“VC3”) by the NMTA

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I am participating in the Virtual Currency Compliance Conference (“VC3”) being held in New York on Wednesday the 14th. The conference is being hosted by the NMTA and will focus on the issue of compliance for virtual currency operators. If you or your company have any interest in virtual currency, then you don’t want to miss VC3. Below is a great article about the conference provided by PRWeb.

– Brian Nelson

Former FinCEN Director Freis to Address the Virtual Currencies Community

On Wednesday, August 14th, at the New York City Bar Association, former Financial Crimes Enforcement Network (“FinCEN”) Director James H. Freis, Jr. will address the first Virtual Currencies Compliance Conference (“VC3”), proudly hosted by the National Money Transmitters Association (http://www.nmta.us)!

Few can speak as authentically as Mr. Freis on the federal approach to regulation of new money transfer technologies. It was during his tenure that FinCEN first issued rules on how the BSA would treat prepaid access (or stored value) products, including mobile and internet money transfer.

Recent guidance from FinCEN further clarified that virtual currency Exchangers and Administrators were also to be considered money services businesses (“MSBs”) under the Bank Secrecy Act (“BSA”). A short time later, Cease and Desist Orders were sent to many Bitcoin operators by the State of California, due to their lack of state licenses.

Some virtual currency entrepreneurs, well aware of their anti-money laundering (“AML”) and state licensing obligations, integrated regulatory compliance into their business plans from the start. Some, however, may not have planned on the expense of compliance. They will now have to implement AML programs, get state-licensed and register with FinCEN, or risk facing criminal charges.

Industry members who come to VC3 will be enlightened by Mr. Freis and seven other compliance experts in interactive sessions, and by a panel of their industry peers at the end of the conference day.

There will be ample time to meet and chat with the experts and each other during a continental breakfast, buffet lunch and two coffee breaks. The day will finish with a networking cocktail mixer from 5:15 p.m. to 7:00 p.m.!

From 7:00 p.m. to 8:30 p.m., VC3 attendees who want to help shape and protect the future of their industry are welcome to attend a discussion of lobbying and self-regulatory strategies.

This meeting will be chaired by Ms. Constance Choi, General Counsel of Payward, Inc., one of the more than seventeen companies that have formed the Digital Asset Transfer Authority (DATA), a new self-regulatory effort that is making rapid progress and has garnered broad support from a large number of important industry players.

Do not miss this intensive learning and networking experience, register now. Early Bird pricing has been extended to August 14, 2013. Please call David Landsman at (917) 921-9529 to see if you qualify for affinity discounts.

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.

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