In the first part of this two-part article we provided a basic understanding of digital currency and various sites to access to obtain a much more detailed review if desired. In the second part, we cover the regulations, recent developments, and why this is an area that credit unions should be monitoring.
Regulation is Coming
As one author indicates it is a Wild West out there. Just take a look at the various agencies and departments of the U.S. government that have weighed in.
- Department of Defense – wants it further investigated as they believe it is being used by the terrorist community.
- Department of Homeland Security – seized nearly $3 million from a business account at a credit union over what the DHS said was an unlicensed money transmitting business.
- FBI – In its complaint against Silk Road, called Silk Road "the most sophisticated and extensive criminal marketplace on the Internet today," used by several thousand drug dealers transacting in bitcoin.
- Federal Election Commission – says that it can be accepted by campaign treasurers to add to campaign financing war chests.
- FinCEN – See above.
- Financial Industry Regulatory Authority (FINRA) – Similar to SEC Alert below.
- Internal Revenue Service (IRS Notice 2014.21) – You better be paying taxes on bitcoin profits as they are like property. Using bitcoin to buy goods and services will in most cases trigger a taxable event, which becomes a new concept in tax reporting. Section 4 of this notice has 16 frequently asked questions and answers.
- NCUA – Just added Schedule E Bank Secrecy Act/Anti-Money Laundering Information. Can the adding of tracking altcoin activity be that far behind?
- New York Department of Financial Services – issued a proposed regulation for comment for operating digital currency exchanges in the State of New York.
- North American Securities Administrators Association – includes digital currency on its list of top ten threats to investors.
- SEC – The SEC warns about investing and that it is risky. Bitcoin does not have a track record of trust. It does not neatly fit under the SEC's jurisdiction. For anyone who wishes to determine if their investment advisor is licensed and/or registered, they could check the SEC's Investment Advisor Public Disclosure website or FINRA's BrokerCheck website.
- U.S. Commodity Futures Trading Commission – I do not think we need to regulate everything, but we need to be more proactive in looking into things. We will be studying bitcoin to see if it fits into the commodities mold.
Recent Developments in Bitcoin Activity
Conferences and Seminars – more organizations are including bitcoin in programs: AICPA, CUNA, MACUMA to name a few.
This spring at www.bitcoinfoundation.org the foundation has posted a risk management survey.
IRS – depending on whom you talk to the recent classification of bitcoin as an asset may have killed it as a currency. More information on bitcoin taxation and reporting can be obtained in the IRS Q & A on this subject.
Processing – the following are just a few of the sites that accept bitcoin transactions: https://bitpay.com, www.overstock.com, www.zincsave.com, www.payveris.com, www.coinbase.com. You can also buy bitcoin gift cards at www.egifter.com/giftcards or play games using bitcoin at www.bitcoindice.com.
QuickBooks Online has become the first cloud accounting solution to enable small businesses to accept bitcoin payments. Intuit's new PayByCoin service is made possible by a new integration between QuickBooks Online and Coinbase, the largest and fastest growing bitcoin wallet service in the United States. More information can be obtained from http://intuitlabs.com.
Robocoin, which developed the world's first bitcoin ATM, announced recently that its ATMs will also soon serve as banks where consumers can store their bitcoins: www.facebook.com/robocoinkiosk.
Should Credit Unions Accept Bitcoins?
In short bitcoin is a private mathematically based virtual currency not based upon organized monetary systems, currently unregulated by any government or national banking system, and with no back-up full faith and credit of a national organization, country or bank. How does a credit union overcome the risks inherent in this definition?
Warren Buffet, when asked about bitcoin, stated that "a check is a way of transmitting money too. Are checks worth a lot of money just because they can transmit money? Are money orders? … I hope bitcoin becomes a better way of doing it, but you can replicate it (money transmission) a bunch of different ways."
There are always discussions about the credit union mission functioning more on serving the underserved. In this global economy over 80% of the population is unbanked (do not have a financial relationship). However, the number of those who have access to or own a cell phone is close to the opposite.
More and more businesses are developing applications to use these phones for the transmittal and storage of some payment method. In the United States, this is not evolving as quickly as in other countries, which may lead some to believe that the digital currency concept is not important. . Nevertheless the potential credit union members of the future are going to want the ability to be able to transfer funds to family, relatives and friends overseas.
As digital currency continues to evolve and becomes a more accepted payment method, you are not going to be able to capture this individual's net paycheck if you do not provide them the ability to avail themselves of this service. The primary financial institution relationship and the ability to market and sell other services more successfully functions off the net check.
There is no way that a credit union would be able to accomplish getting into or exploring the digital currency market on its own. The use of a CUSO (assuming the proposed risk-based capital regulation is modified before becoming final) concentrating on developing and providing a reliable, secure way to utilize the digital currency marketplace is the obvious choice.
I am sure there are start-up CUSOs already in place or on the drawing board with different business plan models being developed. It will not be an easy task, considering the rapidly changing compliance, regulatory and technological challenges that will have to be overcome to provide a secure exchange program.
Credit unions will also need to partner with technological partners to be able to use the digital vaulting, digital wallet and other methods of storage and exchange beyond the cell phone itself. See www.coindesk.com glossary of terms for expanded information on some of these terms.
It is a logical step to assume that the need and demand for a secure exchange site for all the major altcoin types and mobile wallet/web wallet services will not be far behind. Presently, based upon my investigation as well as other authors, there is no qualified method available to drop bitcoin into your retirement investments as an alternative investment to add diversity and limit volatility as many investment advisors would recommend.
It is my understanding that this may be in the works: the Winklevoss twins of Facebook fame have been linked to exploring this type of venture. Once again, potentially something for CUSOs providing other investment services to their members to explore when risks are reduced.
Read more … looking ahead The Future of Digital Currency
Bitcoin use and the use of digital currency is expanding, not contracting. It can be viewed like the film and music industry: always evolving and improving. It will make some rich and wipe others out. There will be side industries that become very profitable (Blockbuster Video) and then go away.
Until regulated, because of lack of identification of the user, it will continue to attract the criminal and underground element. While the IRS has stated that gains are taxable, there is no mechanism in place for the reporting of these transactions. While that may be a good thing from an individual standpoint, without it the huge need for developmental capital will not occur.
Bitcoin is a global instrument, also referred to as ghost cash. The world market will dictate its use, and U.S. regulators will see waning influence in evolving the final initial and constantly changing product.
The number of vendors who will accept altcoins as a method of payment will continue to escalate as more and more companies determine that it must be incorporated into their business philosophy.
Yes, there are benefits to digital currency. As discussed above there are applications that would be beneficial to credit union members. While it may be risky now the ultimate value and concept cannot be denied. Advocates indicate that the internet was viewed with skepticism in its infancy. Credit unions that wish to serve their future and current members need to start studying and understanding this product in an effort to put forth a creative, innovative, and secure solution for the marketplace, as they have in the past and need to continue to do in the future.
David Legge is principal, Financial Institutions, at CliftonLarsonAllen LP in Arlington, Va. CONTACT: 703-825-2135.
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