While some Bitcoin businesses hesitate to respond to the evolving regulatory framework surrounding digital currency, Robert Pargac, director of global investigations and compliance at Navigant Consulting, says Bitcoin businesses should stay proactive and aggressive in their approach to risk and compliance.
The recent Financial Crimes Enforcement Network guidance on virtual currency "gives us a roadmap to allocate our resources," Pargac said during the Virtual Currency Compliance Conference in New York last week. Bitcoin businesses "have limited resources and you want to take those funds and make the company grow but you must dedicate some of those funds to this other area [compliance] that isn't necessarily making revenue."
The three key concepts every money transmitter, especially a Bitcoin business, needs to heed are inherent risk, mitigating controls and residual risk if the controls fail, Pargac says.
Fincen's guidance says Bitcoin businesses are categorized as money services businesses under current law, but Bitcoin's status is still being evaluated by individual courts and state regulators.
While there are still gray areas, Pargac says, businesses should strive to be ahead of regulatory changes. And one of the best ways for Bitcoin businesses to figure out what they should be doing is to look to established money services businesses for best practices, he said.
If Bitcoin businesses build a proactive compliance program they'll have an easier time opening and maintaining a bank account.
"Banks are even more risk averse when it comes to the virtual currency world because of the perceived anonymity that's associated with having a virtual currency account," Pargac said in an interview.
Because banks look at MSBs as risky, several Bitcoin businesses have unexpectedly lost accounts. Bitfloor, which was the fourth largest Bitcoin exchange, halted operations after Capital One Financial Corp. closed its account.
Bitcoin businesses need a compliance program with written processes and procedures, a designated compliance officer and an ongoing training program, said Juan Llanos, executive vice president of operations and compliance officer at Unidos Financial Services Inc., during the presentation.
Several decades ago, there were no specific rules governing money transmitters, but Western Union and MoneyGram knew they were on the radar of legislators. The companies proactively attempted to show law enforcement officers and regulators that they were making an effort to embrace best practices and be part of the solution to anti-money laundering and consumer protections, said Pargac.
Reaching out to regulators early to begin fostering relationships may stop future heavy-handed action, such as the New York State Department of Financial Services subpoenas to 22 emerging payments players.
By reaching out, "you're creating that good will and trust in the relationship that will maintain that relationship in hard times," Pargac says.