Bitcoin: Getting Down to Virtual Currency Basics

Hot potato, hot potato, who’s stuck with the hot potato?

That is what virtual currency Bitcoin has resembled in the past few weeks as multiple credit union players found themselves covered in bad press due to Bitcoin.

But at the same time, there is rising interest in the new-style currency among credit union executives who have their eyes on a younger, tech savvy audience.

But first, the Bitcoin bad news that made headlines in recent weeks, and prompted credit unions and related partners to distance themselves from it.

Case in point: Dwolla, the Des Moines payments innovator, was subpoenaed by the state of New York Aug. 12 in an investigation into virtual currencies such as Bitcoin.

In a written statement, Dwolla said, “Neither Dwolla nor its financial partners process, sell or package virtual currency products or services.”

The company declined to make specific comment on the subpoena.

In May, a $2.9 million Dwolla account held at the $2.4 billion Veridian Credit Union in Waterloo, Iowa was seized by the Department of Homeland Security in a move against Bitcoin exchange Mt. Gox. That seizure became public in mid-August.

In an email, Verdian spokeswoman Andrea Hudnut said, “We’re not engaged in using or holding any form of virtual currency.”

Most recently, tiny $3.8 million New Brunswick, NJ Internet Archive Federal Credit Union was ensnared in a contretemps with Bitcoin exchange Tradehill in late August, in which Tradehill said IAFCU would host its accounts. IAFCU countered Aug. 29, posting on its website that it held no Bitcoin accounts whatsoever. Tradehill subsequently suspended trading and pointed a blaming finger at IAFCU.

Just what is Bitcoin? It’s a currency generated in accordance with algorithms but it has no national government backing. Total value is set at around $1.3 billion, and daily there are some 50,000 Bitcoin transactions, according to the Bitcoin Foundation.

That is a blip compared to the movement of US money, but entrepreneur and Bitcoin expert Trace Mayer said that amount is larger than the money stock of some 60 countries.

There also is surging interest in Bitcoin and similar alternative, virtual currencies, said Carol Van Cleef, an attorney at Patton Boggs in Washington who specializes in banking issues. Said van “We are seeing rapid proliferation of emerging payments alternatives and we are seeing more adoption of Bitcoins in mainstream commerce,” she said.

Bitcoin won headlines months ago when the nation of Cyprus threatened to seize significant portions of bank accounts on the island. That triggered and a flight to Bitcoin that ramped up the price of a single Bitcoin from less than $100 to more than $260 in a matter of days. That price has since settled in the vicinity of $130, but even so Bitcoin’s volatility has caused many to question the solidity of the currency.

But there are others for whom Bitcoin, plainly put, is the new, cool cash equivalent.

What’s attractive about Bitcoin to its supporters—and worrisome to its detractors—is that it functions without regard to national borders. It’s also disruptive in its pricing, with transfers involving nominal fees of usually 1% or less.

Which puts into focus the key question: are Bitcoins something credit unions need to look into?

Todd Erickson, president of the Cary, N.C.-based CUSO Technology Navigator, said there is real interest among credit unions in Bitcoin. He pointed to a recent webinar hosted by Technology Navigator that drew participants from 27 credit unions.

He said that interest is especially high among credit unions where a university is central to the field of membership.

“It’s just a matter of time before a CUSO begins to offer Bitcoin exchange services. It will happen,” he said.

But, he added, that probably won’t happen this year.

“There needs to be positive momentum around Bitcoin to create sufficient interest,” he said.

Trading in Bitcoin is legal, a point that was confirmed by FinCEN guidance issued earlier this year. But there are caveats, said Braden Perry, a former federal enforcement attorney now with the Prairie Village, Kan.-based firm Kennyhertz Perry, LLC.

“While there are no black letter laws prohibiting virtual currency in the traditional financial system, an institution wishing to offer a Bitcoin-denominated account would likely face an uphill legal and regulatory battle,” he said.

Perry said the FinCEN guidance provided no new rules or regulations. Essentially, it’s an acknowledgment that virtual currencies are viewed like any other basic money-service business and the same Bank Secrecy Act and record-keeping and reporting responsibilities apply, he said.

“A trading exchange or credit facility utilizing Bitcoins as payments or deposits would be considered an exchanger, and thus be subject to FinCEN requirements for Money Transmitters,” Perry said.

At many credit unions, the apparent upshot of the regulatory signals is confusion.

“The guidance is not straightforward. It is incredibly confusing,” said one credit union CEO who asked for anonymity on the advice of legal counsel.

He added that, according to his analysis, there also would be a substantial staff burden in complying with regulatory requirements imposed on a credit union classified as a money transmitter under FinCEN, and he is unsure the costs to process Bitcoin transactions are worth the benefits.

“You have to decide if it is worth it to adhere to the regulations and for us, right now, the answer is no,” he said. But he insisted that door could open if the Bitcoin demand surfaced.

Most credit unions seem to be in the same boat. Nick Holland, a payments specialist with Javelin Strategy & Research, who recently authored a report on emerging payment modalities, said he is unaware of any U.S. financial institutions that presently offer Bitcoin denominated accounts.

“There is a lack of certainty about what the regulators might do with Bitcoin,” said Holland, who added there are possibilities regulators may make this onerous, especially in regard to know your customer due diligence.

Significant anonymity is baked into Bitcoin—although the same could be said of cash, point out Bitcoin supporters—and threading that particular needle in a way that satisfies regulators may prove challenging, sources said.

Does this add up to the death Bitcoin? Not according to Erickson.

“The mechanism behind Bitcoin is sound,” he said. “I believe it will happen. It just will take time.”

Holland’s prescription is similar.

“My suggestion is that credit unions keep an eye on Bitcoin,” he said. “The potential is uncertain. But it is early days for Bitcoin.”

 

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