Taking a chance on Bitcoin
Banks are trying their best to avoid doing business with Bitcoin exchanges, but some hardy institutions are actively seeking them out.
For many entrepreneurs struggling to start their own Bitcoin exchange, being able to open a suitable bank account for their business is but a dream.
“Finding a big bank willing to work with you is the holy grail,” says Joel Dalais, a member of the Bitcoin Foundation’s law and policy steering committee, and director of the not-quite-up-and-running Bitcoin exchange IBWT. “When we tell the banks what we want, generally their attitudes range from ‘what is this?’ to ‘this is terrible’.”
It has been four years since the Bitcoin crypto-currency was founded by the mysterious hacker (or group of hackers) known as Satoshi Nakamoto. Since then, it has spread around the world. It can now be used to buy pints of beer in north London, or socks made from alpaca wool in Massachusetts.
However, rather than gaining more acceptance from banks, as Bitcoin matures it is being treated with a growing suspicion, with just a few specialist institutions diving into the gap in the market.
A host of established exchanges and companies that deal with Bitcoin have had accounts closed or suspended this year.
The list is long and includes Bitfloor, which had its account suspended by Capital One, and the Canadian exchange LibertyBit, whose bank account was closed by the Royal Bank of Canada (RBC). LibertyBit says RBC cited unease with “the virtual currency aspect of the business”.
JPMorgan Chase is also uneasy. It suspended the account of Bitspend, a company that receives money from exchanges. Bitspend CEO Justin Whelchel says JPM Chase told them its account was being reviewed to “decide whether the source of deposits is legitimate”.
TransferWise, a business that offers international money transfers, also announced it was stopping transfers to Bitcoin exchanges as their banking providers were “not comfortable with Bitcoin”.
The hesitance of the banking community is justified. Though Bitcoin’s market capitalization is now in excess of $1 billion, it is still a new phenomenon and its position with regulators is unclear.
Bitcoin exchanges have repeatedly proved to be troublemakers, causing reputational and sometimes financial damage to their banks usually either by getting hacked or by violating anti-money-laundering rules.
However, as leading banks do more to avoid Bitcoin, pent-up demand from exchanges for banking facilities is growing. This has tempted a few hardy institutions to take the plunge, forming more comprehensive partnerships as a way of getting a handle on the extra risk.
All have been hailed as landmark deals but few have been successful.
On May 6, Silicon Valley Bank partnered with the US exchange CoinLab and the world’s biggest Bitcoin exchange MtGox. Announcing the deal, CoinLab CEO Peter Vessenes said the partnership would try to solve the “two major difficulties Bitcoin exchange customers have traditionally faced: banking troubles for the underlying exchange, and security of their coins”.
However, it did not end well. The partnership imploded and resulted in a $75 million lawsuit as CoinLab accused MtGox of breaching its contract, failing to give it exclusive access to the North American market.
Another breakthrough deal was struck between the exchange Bitcoin-Central, the payments company Paymium and the French bank Crédit Mutuel. Launching the partnership, Pierre Noizat, co-founder of Paymium, said the deal made Bitcoin-Central the first Bitcoin exchange “operating within the framework of European regulations”.
“Since 2010, we kept learning, when MtGox got kicked out of France for not complying with the law, we learnt from it; when our banks gave us a hard time, we learnt from it,” says Noizat.
However, Paymium’s learning curve didn’t stop at the launch. After just a couple of months, Bitcoin-Central was hacked, bitcoins were stolen, and the exchange was forced to shut down and review security.
“The attack on Bitcoin-Central underlines the technical vulnerability of Bitcoin exchanges and crystalizes the challenges banks are up against when they work with these companies,” says Adam Vaziri, a consultant at Neopay, a company that advises electronic-money firms on regulation.
“The concerns about money laundering are easily addressed by transposing controls that have already been developed and used by conventional companies, but for hacking, Bitcoin has to develop its own bespoke set of robust procedures and security protocols.”
Breaching the security of a high-profile Bitcoin exchange can be profitable. Not only do the modern-day crypto-bank robbers get to keep the bitcoins they steal, they can also make money from speculating on the value of Bitcoin as every security breach shakes confidence in Bitcoin as a currency, causing its value to drop.
“Bitcoin exchanges are facing massive security issues as the Bitcoin phenomenon gains traction,” says Matthias Kröner, the CEO of Fidor, another lender that has teamed up with a Bitcoin exchange.