Changes in MSB Regulation for Digital Currencies

September 21, 2017

The global financial community is still working out the details when it comes to digital currencies like Bitcoin. One side wants to treat (read: regulate) digital currency as a legal currency while the other side wants to preserve the deregulated system. In the midst of this evolution, Bitcoin ATM operators and bitcoin-friendly banks are in limbo. Businesses who deal with digital currencies are expected to meet all regulatory requirements as they are handed down. The penalty for not meeting regulations comes in the form of steep fines and potential business closure.

Digital Currency Regulation

There are whispers among Congress that legislation is currently being drafted to protect digital currencies that can demonstrate compliance. The legislation would offer protection from government and regulatory interference for digital currencies that have proper safeguards in place to deter financial crimes, such as terrorist financing and the purchase of illegal goods.
The goal is to keep illicit activities out of certain types of digital currency while supporting mainstream adoption of these currencies. One part of the bill aims to shield certain digital currencies from consideration as a form of security or investment. This mean that currency transfers will avoid taxation.
The Uniform Law Commission (ULC) is also taking an interest in cryptocurrency regulation. The ULC was founded in 1892 as a non-profit association made up of 350 commissioners, all lawyers by trade. The ULC seeks to bring clarity to particularly onerous or unstable areas of state law through drafted legislation. Given the unwieldy nature of digital currency regulation, it is no surprise that they are getting involved.
Their attempts to help states regulate tech have been met with public boycotts and lawsuits. For the time being, the group is stepping aside. The industry is hoping to use this window to reverse precious legislation and deregulate the industry. The main question at hand in 2017 is whether the federal government or individual states will govern digital currency regulation.
Nevada is currently the most Bitcoin-friendly state and Blockchain transactions aren’t taxed there. Texas and New Hampshire are also warming up to digital currency. Washington, Illinois, Hawaii, California, and Florida are each working to pass new or amended digital currency regulation.
Money service businesses who deal in Bitcoin are waiting with baited breath for the next round of digital currency regulations and rulings.

Rise of Bitcoin ATMs

The American public is enjoying increasing access to Bitcoin through the rise of Bitcoin ATMs. Since 2014, when there were virtually zero Bitcoin ATMs, the US has added more than 900, a huge chunk of the 1,600 Bitcoin ATMs open worldwide. This increased visibility is one factor driving the demand for and popularity of cryptocurrencies.
Bitcoin ATM operators are struggling to expand to meet the needs of their customers. Many Bitcoin kiosks are limited by the geographic barriers of their financial institutions and contracted armored cash couriers. Due to wholesale derisking across the money service business industry by financial institutions in the United States, a secure Bitcoin-friendly bank account is hard to secure. When a kiosk operator does secure a real business bank account, they may be limited by the account location.
If a Bitcoin kiosk operator’s bank account is in Louisiana, he can’t expand into Texas. Why not? He won’t be able to transport the necessary cash back and forth between the account and the kiosk. In some cases, an armoured courier can step in and help, but many don’t have national capabilities. These “growing pains” are rampant in the industry and contribute to growing frustration over mixed regulatory messages.

Bitcoin Banking

For those who argue that Bitcoin may become corrupt, the counterargument is that some banks already are. In the wake of the 2009 financial crisis, it came to light that some big banks were engagement in less than transparent business practices. With this in mind, fear over the corruption of Bitcoin anything we haven’t already encountered? The difference, of course, is that banking regulation is pretty straight forward in comparison to digital currency regulation. The fear of the unknown and the potential uncertainty of digital currencies are giving some people doubts.
The potential risk is also driving banks to refuse service to Bitcoin-related businesses. This leaves Bitcoin kiosk operators and others scrambling to secure business bank accounts. In some cases, business owners are forced to put expansion on hold or shut down their business entirely. Others are able to secure bank accounts to keep their business operating, but are forced to drive long distances to make daily cash drops.
Bitcoin is a potential threat to banks since it operates outside of their sphere. The notion of a currency that is outside of bank control is worrisome to big banks. The American government is also concerned, since digital currencies like Bitcoin reduce their ability to keep tabs on currency within US borders. In general, the potential for a loss of control over currency is viewed as a threat by those in power of the traditional financial services industry.
Does this mean that Bitcoin and banking can’t mix? Of course not! There are Bitcoin-friendly banks who are willing to work with compliant and diligent Bitcoin-related businesses. Many argue that digital currencies like Bitcoin are a natural complement to the existing banking system. When lending halts during a financial crisis, like the one we experienced in 2009, digital currencies can help smooth things over and deliver money to those who need it. Digital currencies can fill gaps in the banking system to promote financial inclusion and ease the transfer of money between parties. Bitcoin is heralded as the ideal form of currency for online transactions due to its secure nature.
National Check and Currency continues to keep track of current regulatory trends. NCC’s team of MSB regulation and compliance experts use the latest technology and responsive customer service to keep their clients head of the curve.

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