You're Reading...
Interviews, Virtual Currencies

“Bitcoiners Must Understand that Compliance is Just the Beginning”

[Reading Time: 15 minutes] 

Interview with David Landsman, Executive Director of the National Money Transmitters Association (NMTA) – PART TWO

Longer post than usual, I’m aware, but well worth it –the closing of bank accounts, the Bitcoin Foundation Cease & Desist Order from California…  David comments on it all and gives links to valuable resources!

In PART ONE, David talked about the image problems that all money transmitters have in the United States, the fragmented regulatory regime and the likelihood of a federal license, now that the Bitcoin community has joined the fray.

Read on for David’s strong viewpoint on US banks –very timely, given the increasing closing of Bitcoin operator accounts in the US–, and the reasons why many legal and PR efforts in fighting the closing of accounts have so far been fruitless.


“Don’t think a federal license would cure the problem.  Nor will getting compliance right.  Bitcoiners should be clear about that.”

JL: You said before that you have not heard the states take any position on Bitcoin yet.  However, the fact that the federal government considers virtual currency exchangers and operators as money transmitters means that they, whether located in the US or overseas, have to get licensed where required, right?  New York and Texas have been very explicit about out-of-state money transmitters and examiners from North Carolina and California confirmed to me that they interpret their laws exactly the same way.

DL: As of yet, I, personally, have not heard or seen a state regulator comment on virtual currency as specifically as FinCEN did on March 18, 2013.  As you know, FinCEN and the states make up their minds independently from each other and each state has its own laws to follow.  Most of those laws define money transmission broadly enough to include stored value (‘by any and all means’), and define stored value broadly enough to include Bitcoin (‘monetary value evidenced by an electronic record’).

It is a moving target, but always moving in one direction. For example, Connecticut just passed a law on June 19 that was intended to remove all doubt on the very questions we are discussing here.  In it, they clarify that “A person shall be deemed to be engaged in the business of money transmission in this state [not only] if such person: (1) Has a place of business in this state, [but also, if such person] (2) receives money or monetary value in this state or from a person located in this state, (3) transmits money or monetary value from a location in this state or to a person located in this state, (4) issues stored value or payment instruments that are sold in this state, or (5) sells stored value or payment instruments in this state.”  [Emphasis and comments added.]  They also add stored value to their definition of money transmission and remove any reference to “Connecticut payment instruments.”

So, when approaching a state, first, read the laws and any regulations or rulings that have been published, and watch for any recent changes that may have come from the legislature or the regulator.  If there remains any doubt, speak to a knowledgeable lawyer and see if he or she knows whether the question has been ruled on by that state in a situation exactly matching the facts and circumstances of your business model.

You may do so, but I would not recommend applying for a state license unless you are sure it is required.  Who knows?  It would be nice if you were able to get confirmation in writing that a particular state, for some reason, just does not feel like regulating Bitcoin yet, or does not yet care to regulate transmitters who have no physical presence in their state.

But better safe than sorry.  The US Department of Justice will not be bothered by any fine points of state law and, indeed, most states will tell you that you need a license to do the Bitcoin business with their residents even if you are located out of state.  If the law is ambiguous, do not guess: write them a letter and ask. If they fail to respond in a timely manner, you may want to go ahead and file, anyway.

“The rejectionist anarcho-libertarianism of some Bitcoiners is a little like a childish tantrum, an expression of anger.”

JL: Short of hiring a lawyer (expensive), what resources on the subject of regulation are publicly available to crypto-entrepreneurs?

DL: Tom Brown of Paul Hastings LLC not too long ago did a wonderful 50-state summary.  Another good way to look up these laws is through the NMLS Resource Center, or the NMTA’s State-Related Resources page.

The regulation of out-of-state-located money transmitters is just one aspect of the question.  Other aspects to look at are sender-not-present-in the state (just the receiver, or just the bank account); what used to be exempt 2-party forex transactions are now sometimes a trigger even if the money merely moves from place to place; explicit exemptions for acting as agent-of-the-payee; modality, role, other underlying transaction purposes (like forex), etc.  Any or all of these aspects and factors may be considered reason not to require a license.

Unfortunately, I don’t think any state will see Bitcoin as a pure, 2-party forex transaction, and not just because it is not issued by a sovereign government.  Bitcoin can be likened to traveler’s checks, the sale of which starts out as a two-party transaction.  Some theoretical third party may or may not enter the picture, later.  A license is required to sell travelers checks in just about every state.

Now California has issued a Cease and Desist order to the Bitcoin Foundation, on suspicion of unlicensed money transmission.  The Bitcoin Foundation denies any such activity.  I tend to believe them.  They just had a conference.  Surely, merely accepting payment in Bitcoin and encouraging the use of Bitcoin could not be construed as money transmission, could it?  That would be like the NMTA being suspected of being a money transmitter.  We are not; we are a trade association of money transmitters that gives conferences.  Maybe in this brave new world, that will be enough.  Maybe the NMTA needs to get a license?  Who knows anymore?

JL: What if you only buy Bitcoin from consumers?  Isn’t it true that states might mostly be interested in monitoring the sale of Bitcoin, but perhaps not care so much about the purchasing (buying back) type of transaction?

DL: When the consumer forks over cash for a theoretical promise to pay, the consumer needs protection from seller default, but when you are giving the consumer cash and settling on the spot, a large chunk of the consumer-protection angle falls away, no?  I wouldn’t count on it.  I think the main defining characteristic will wind up being whether you are ‘engaged in the business of’ trading Bitcoin, in either direction.

“Money transmitters have been living with the ‘unbanking’ problem since the early 90s, and it has only gotten worse, despite all our efforts.”

JL: Let’s talk about the “unbanking” problem.  Crypto-entrepreneurs are flabbergasted that it’s happening. What do you say to them?

DL: To those entrepreneurs, I would say, the banking problem is real.  Believe it and fight it, legally. Do not commit bank fraud to try to circumvent it; you will only compound the problem.

Bitcoiners are coming late to the game.  This has been going on a long time.  We have been living with this problem since the early 90s, and it has only gotten worse, despite all our efforts. The UKMTA just hired 4 professional lobbyists as a result of the calamitous recent Barclays closings. (We can discuss gathering a fund to hire lobbyists ourselves, if there is enough interest.)

Regulatory pressure is a ratchet that only turns in one direction: tighter.  The fact that society at large does not know about (or care) about this issue is one of the hallmarks (and causes) of our situation, and reflects that image problem I was talking about earlier.  In the beginning, we could still hopscotch from bank to bank.  Finally, the available choices became fewer and fewer, and more and more unsuited to our needs; so now, we –and Bitcoiners– have to turn and face the strain.

JL: And it happens even to companies that are properly licensed, and have solid compliance programs, right?  How can that be?

DL: That’s right, it’s a bad situation.  Compliance is just the beginning.  Lobbying and self regulation will also be necessary.  We are already not only legal by both federal and state law, we even have state licenses, which are granted only after in-depth scrutiny of the company and its shareholders.  Why are we still treated like politically exposed persons (PEPs), unlawful internet gambling establishments and marijuana dispensaries and growers?  These customer groups all have some trouble getting bank accounts, and understandably so.  But we are licensed money transmitters, and we still lose our accounts!

JL: So, if our state licenses really do not help us in keeping bank accounts, what will?  Clearly, the issue is more complex.

DL: It certainly is.  The first problem is that under current practice, banks are held way too responsible for the bad acts of their customers and for knowing in advance such acts would occur.  This refers mostly to the account-opening phase, as opposed to the need for ongoing monitoring.  This pre-crime, this assumption of guilt, is intensified in the case of certain ‘high-risk’ customer classes, as in the general case of MSBs, and is most intense in the specific case of money transmitters.  We are flagged as belonging to the highest of the high-risk categories, despite our licenses.  Even if the state licenses were to become the most reliable transparent credential imaginable, the banks would not be able to lay off even part of their risk on the fact that there is a license because government would never allow them to do so (unless we get the law changed.)

Secondly, not only are standards of state supervision obscure and uneven, but the truth is that even the best state supervision is no guarantee of compliance program quality.  There are many licensees that are really not that good at compliance.

This is why enhanced compliance credentialing for money transmitters, one way or the other, has to be part of any solution.  It would help to let banks see our state audits, something that is prohibited now by all the states’ laws.  The only thing I have heard of that comes close to a showable AML compliance credential for a company, is a ‘No Findings Letter,’ something I hear the IRS Title 31 examiners, after completing a satisfactory exam, will issue upon request.

“In the end, banks are simply following their regulators’ guidelines, so how can they be legally faulted?”

JL: A young, bright crypto-preneur came to me the other day, fuming: “Are banks not acting anti-competitively when they prevent businesses from having accounts?  Whether the business is an MSB or a bubble gum shop, banks should not be able to say no to any account!  How is it possible for banks to cartel and decide on their own (make up their own rules) on who they will bank, leaving customers and businesses no alternatives?!”  What would you say to him?

DL: I would not subscribe to any conspiracy or monopoly thinking.  I never thought there was a right to a bank account, as such, but I did think we had the right to be treated with fairness.  How wrong I was!  What ultimately stops the government from just mandating that banks accept a customer is that it would come paired with an implied safe harbor, which is anathema to government.  So anything close to a ‘right’ to a bank account is something which government will never agree to.  Because you cannot force a bank to take a lot of risky customers and then complain about the bank’s inability to manage those risks, a broad safe harbor would be too strongly implied.

I am told the MSB Act of 2008 would not pass Congress today because it looks too much like a safe harbor. This Act merely sought to remove the onus of account-opening due diligence off the shoulders of those banks that wished to bank us.  Unfortunately, the checking-for-a-state-license requirement was omitted, because the banks would have found that too coercive, as if a new obligation had been created for them, which would not have been the case.  So you are left with trying to force a bank to be “fair.” OK, so government issues more guidance…  Then nothing happens.  And they say, “Sorry.”  Until it is explicitly made a public policy goal to reasonably bank licensed transmitters, this situation will continue.

JL: The NMTA, however, has attempted the legal recourse path against the ongoing ‘unbanking’ of its members before.  If I remember correctly, a few years back there were efforts to pursue litigation on antitrust [abuse of monopoly power] and redlining [denying or charging more for services to particular segments] grounds.

DL: Yes, we explored every cause of action we could think of: the APA (Administrative Procedure Act) was looked at, various state laws, anti-trust, civil rights, administrative and mandamus actions, all were considered.  We paid a respected class-action lawyer $10,000 to do the research back in 2006.  He thought we had a pretty good chance, but he also pointed out the potential pitfalls.  Ultimately, all avenues were rejected by group consensus as being too uncertain of victory to warrant spending the substantial sums that would be needed to guarantee follow-through in any protracted legal action.

In all of those mind experiments, the legal grounds you could use were very narrow and standards of proof were very high.  It seems our situation did not fit any existing pattern of case law; new law would have to be made.  Also, no one volunteered to be the lead plaintiff in a class action for fear of antagonizing their remaining bank relationships.

“In a sense, we are suffering because many (but not all) banks are kind of inept at compliance, and many (but not all) banks have made some poor choices in the past.”

JL: Could you please expand on the reasons why those attempts failed?

DL: Antitrust laws look at competitive conditions in an industry.  As a class, most banks haven’t the slightest interest in our customers and do not even offer remittances themselves.  This bears out empirically because, after 10 years of trying (and being prodded), banks have captured at best, perhaps 6% of the market.  The other obvious truth is that banks are legitimately concerned about regulatory and reputational risk.  So forget about antitrust grounds.

Antitrust and civil rights laws do try to look beyond good-sounding excuses to address results and effects and impose remedies when possible (think disparate impact and affirmative action).  But those bodies of law also say the court must consider motivation, context and other countervailing factors, other social goals such as government regulatory requirements and the bank’s right to manage the risk it assumes, before reaching any determination of culpability or liability.

Civil rights laws require first that the aggrieved party be among a ‘protected class.’ We could not use national origin because banks did bank those ethnic groups, in general.

JL: What other courses of action are there for the NMTA and, of course, for Bitcoin ventures that take the ‘financial services’ path?

DL: It recently occurred to me that we could use the case of the Somali money transmitters to show discrimination on the basis of national origin.  By forcing the banks to prove the opposite, we could overcome the evidence problem.  Even among those banks that banked money transmitters, by subpoenaing the banks’ records, we could surely show that Somali money transmitters had it worse than any other national or ethnic group.  But to imagine success there would still be stretching the outer limits of any ‘disparate impact’ theory, because the banks would still have a very credible excuse: their legitimate regulatory concerns about the highest of high-risk countries, the three territories referred to generally as Somalia.

In the end, banks are simply following their regulators’ guidelines, so how can they be legally faulted?  There is no such thing as the right to a bank account and no one can force a bank to do anything (except close our accounts).  Regulators say “what a shame it is,” and that it is not their fault at all.  Some still even deny it is happening.  So appealing to a sense of ‘fairness’ is not really going to help.

The NMTA will continue to fight for a more coordinated and centralized regulatory system, but don’t think a Federal license would cure the problem.  Nor will getting compliance right.  Bitcoiners should be clear about that.  In a sense, we are suffering because many (but not all) banks are kind of inept at compliance, and many (but not all) banks have made some poor choices in the past.

“A strong, grassroots lobbying effort is required; we must pursue a legislative agenda.”

JL: How about self-regulation initiatives? I know the NMTA has attempted that in the past too.

DL: Just as all regulation gets done through institutions, so all work should get done through institutions.  We need to create our own industry institutions.  We have to create the future we want to see.  Having a ‘regular’ regulated system will benefit everybody.  You have the right to have a bank account without having to dissemble.

A strong, grassroots lobbying effort is required; we must pursue a legislative agenda. The chance to get a government-issued accreditation, and the chance of getting bank accounts, are the only things that would incentivize people in the industry to make the effort to join up like that.

We are planning to host an event soon that would consist of three parts: (1) Activism: Self-regulation measures we can do on our own / Lobbying / Legislation-Writing (Part of the legislative proposal includes the SRO concept.) (2) Teaching Legal and Regulatory compliance subjects for Bitcoiners. (3) Networking time, for Bitcoiners to meet licensees.

JL: Many in the Bitcoin community distrust institutions of any kind.  What do you say to them?

DL: The rejectionist anarcho-libertarianism of some Bitcoiners is a little like a childish tantrum, an expression of anger. What the flamers don’t get is that this is a tough one, and it is serious.  Entities matter, institutions matter.  If we are here to create an environment for businesses to thrive and society to benefit, we have to work through institutions.

JL: I thought you might want to comment partnerships with credit unions, other money transmitters (as agents), banks, etc. These guys are looking for ways to operate legally.  I’d like to provide ideas, options, solutions…

DL: We will have a matchmaking networking segment to the conference, so people can meet. I think it would benefit the ‘traditional money transmitters to get to know Bitcoin, and it would benefit the Bitcoiners to sell to licensees, and/or work as agents under their licenses.  When there is a licensee facing the consumer, a licensee that can be held responsible for the activity, it might provide one more argument why such a Bitcoiner would be more of a ‘wholesaler’ and should not require a license.

David can be reached at david@nmta.us.

About Juan Llanos

Innovative compliance, operations and technology executive leveraging emerging technologies, management and leadership best practices (and, above all, common sense!) to empower businesses and compliance professionals for success.


3 thoughts on ““Bitcoiners Must Understand that Compliance is Just the Beginning”

  1. Ahahahahahahahahahaha, you really think anyone can control Bitcoin? Good luck with that mate. Try and stop us.

    Posted by corey | 2013/06/24, 8:06 pm
  2. Hahahahahaha this article is a good joke. Bitcoin is the future!

    Posted by NNT | 2013/06/28, 8:43 am

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: