Bitcoin, the digital money created as an alternative to currencies controlled by nations and banks, is finding that its wider adoption depends on both as governments in China and the U.S. demand enthusiasts play by existing rules.
Bitcoin exchanges, payment processors and other startups say they need banks to connect them to the existing payments system and provide basic services like checking accounts. To do that, the fledgling companies must convince the regulators who police the banks that Bitcoins aren’t being used to conceal illicit activity.
“Banks are scared to deal with Bitcoin companies, even if they really want to,” said Stephen Pair, co-founder and chief technical officer of BitPay Inc., an Atlanta-based company that processes payments for merchants in Bitcoin. Pair said BitPay has relationships with banks in the U.S., Canada and Europe; he declined to name them at the banks’ request.
Regulators show little sign of losing interest in tracking financial flows, be they in dollars, renminbi or Bitcoin. China’s central bank yesterday barred financial institutions from buying and selling the virtual currency and from pricing products in Bitcoin, sending prices tumbling more than 10 percent, according to the CoinDesk Bitcoin Price Index, which synthesizes prices across major global exchanges where Bitcoins can be traded for traditional currency. Its value stood at $1,052.25 at 5 p.m. New York time.
Prices jumped last month when a Department of Justice official described the currency as “a legal means of exchange.” Still, another regulator at the same event warned that Bitcoin-related businesses would need to meet current money-laundering standards before banks would agree to work with them. Central banks in the Netherlands and France have also warned that the currency has no government guarantees.
Regulators have pressured banks to close some Bitcoin-related accounts. Tradehill Inc., a San Francisco-based exchange, shut down in August after its bank, Internet Archive Federal Credit Union, dumped Bitcoin-related clients for what it called “regulatory issues.” U.S. officials also shut down an account at Wells Fargo & Co. used by Mt. Gox, a Japan-based exchange, to service U.S. customers.
Introduced in 2008 by a programmer or group of programmers under the name Satoshi Nakamoto, Bitcoin is the most prominent of a group of virtual currencies -- money that exists mainly as a string of code -- that have no central issuing authority. Today, despite its unclear status, Bitcoin can be used to pay for t-shirts, food or an appointment with a Manhattan psychiatrist.
Bank reluctance to host accounts for Bitcoin-related transactions is an obstacle for businesses seeking to expand its use. Without access to traditional banks and the ability to freely exchange Bitcoin for other currencies, the virtual currency risks remaining a novelty for niche users. The issue is expected to be a prime topic of discussion at a conference for Bitcoin enthusiasts next week in Las Vegas.
Richard Riese, senior vice president of the American Bankers Association, said the ability to bank Bitcoin transactions “is not high on our members’ list” of priorities. By contrast, at a recent ABA conference, bankers were less concerned about providing bank accounts for marijuana sellers in the states of Colorado and Washington, which have legalized recreational use while it remains a federal crime.
Because of regulatory pressure in the U.S., much of the exchange business has moved to Britain, Japan and China, Jered Kenna, founder of Tradehill, the Bitcoin exchange that lost its bank, said in an interview. LightSpeed Venture Partners, based in Menlo Park, California, announced on Nov. 18 that it would invest $5 million in BTC China, now the world’s largest Bitcoin exchange by volume.
“The biggest indicator that the U.S. is losing this battle is that the first major VC to make an investment was in China,” Kenna said.
Bitcoin-related businesses say that when they do find banks willing to work with them, they often require them to keep the banking relationship quiet. Fred Ehrsam, co-founder of Coinbase, a San Francisco company that facilitates transactions for Bitcoin users by hosting digital wallets to store the currency, said the banks his firm uses don’t want to be inundated with requests.
“Our bank has asked us not to tell -- not because they’re ashamed but because so many Bitcoin businesses are looking for bank accounts,” Ehrsam said.
Mary Dent, a former bank general counsel in Silicon Valley, said bankers are reacting to Bitcoin the way most people do to any new payment form.
“If you heard about somebody getting mugged for the first time, you’d think cash is crazy,” said Dent, founder of Palo Alto, California-based consultancy dcIQ. “If you heard about credit card fraud for the first time, you’d think cards are crazy. Bitcoin is suffering from that.”
Richele Messick, a spokeswoman for Wells Fargo, declined to comment, as did Tyler Daluz of Citigroup Inc.
This idea -- that Bitcoin is more of a threat than an opportunity -- has dominated bank thinking about Bitcoin for most of its existence, Dent said. The federal bust of the Silk Road Hidden Website, an online drug and weapon marketplace where users paid in Bitcoin, highlighted the potential for illicit business, while thieves have also purloined Bitcoins online.
Benjamin Lawsky, the superintendent of New York’s Department of Financial Services subpoenaed 22 Bitcoin-related companies this year. In an Oct. 1 interview, he said the “major advantage” Bitcoin provides is anonymity, a cloak for illegality.
Marco Santori, a lawyer with Nesenoff & Miltenberg LLP in New York, said the bank position is reasonable since U.S. law has “deputized” them to scrutinize every transaction for possible money laundering.
“Banks will want to provide services to administrators or exchanges that show not only great innovation, but also great integrity and transparency,” said Jennifer Shasky Calvery, director of the Treasury Department’s Financial Crimes Enforcement Network.
As a result, Bitcoin companies have ramped up their Washington lobbying, hiring lawyers and former regulators to make their case to government agencies and demonstrate to potential banking partners that they take regulators seriously.
Ehrsam, a former Goldman Sachs Group Inc trader, hired a chief compliance officer, Martine Niejadlik, who previously worked at EBay Inc and Amazon.com Inc. “She’s seen this movie before,” Ehrsam said.
Circle Internet Financial Inc. won the biggest venture capital investment yet, $9 million, for a Bitcoin startup, from Accel Partners and General Catalyst Partners. One of its first moves was to hire John Beccia, former chief regulatory counsel for the Financial Services Roundtable, a lobbying group that represents major financial institutions including JPMorgan Chase & Co. and Bank of America Corp. and the dominant payment networks, Visa Inc. and MasterCard International Inc.
Circle also put Raj Date, former deputy director of the Consumer Financial Protection Bureau and a veteran of Capital One Financial Corp., on its board.
All the same, the established financial services industry expresses skepticism of prospects for business ventures with Bitcoin entrepreneurs.
“For now I would opine that we are not yet there with digital currencies,” Paul Smocer, who oversees technology policy for the Washington-based Roundtable, said at a Nov. 19 congressional hearing. “They do provide opportunities -- more accurately, perhaps, suggest areas of opportunity -- but we will need to address the threats to consumers and society.”
Kenna, the head of Bitcoin exchange Tradehill, emphasized that “for the foreseeable future” the industry would need banks and need to respond to their concerns. “And the foreseeable future could be 50 years.”
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