How Bitcoin's Banking Crunch is Holding Back US Startups
Following its May launch, QuickCoin captured attention with its novel integration of Facebook's ubiquitous social media platform and simple bitcoin wallet technology – and the wider tech world took notice.
Soon, the self-funded company began to capitalize on its momentum, and on 11th August, QuickCoin had the first of its seed round capital wired to its corporate bank account at Wells Fargo. The celebration, however, was short-lived.
As CEO Nathan Lands told CoinDesk:
"Everything seemed fine, when all of a sudden I started noticing that some of our bills were bouncing because the debit card was being declined."
Lands alleges that weeks of uncertainty ensued, and that in the end, QuickCoin's bank account was closed. Lands claims he was never issued a formal letter regarding account closure, although CoinDesk did confirm that transactions made via QuickCoin's account were denied.
The result is that ultimately, the San Francisco-based company was forced to explore other options, including looking offshore, for its banking needs. QuickCoin claims it now has a working solution in place for its banking needs and that its team is making plans for the longer term.
Wells Fargo would not comment on QuickCoin's case, citing confidentiality.
Lands, however, asserts that his story is not unique, framing it as indicative of a broad failure in the US banking system to accommodate the bitcoin industry and companies like his own that want to support domestic businesses.
What may be most interesting about Lands' case, however, is what he learned when he went searching for answers to his banking issues.
Behind closed doors
In emails provided to CoinDesk, Lands gave evidence that some of the ecosystem's most notable investors acknowledge in private that US startups are facing severe difficulties gaining access to banking partnerships, and that few solutions to this problem exist.
One prominent bitcoin company founder suggested that QuickCoin should "burn through a couple smaller banks" before finding a stable partnership.
He advised Lands:
"[Don't] tell them what you do until they find out, which buys you a few months."
The CEO, who wished to remain unnamed, said he would be willing to assist QuickCoin, but that the help would not be free.
"Banks are all shutting off bitcoin companies. If I can find one, will let you know," another investor wrote.
CoinDesk reached out to a number of the investors and businesses to discuss Lands' experience and the wider issue, with all acknowledging its existence. Further, there was widespread agreement on the situation – that few banks are willing to work with bitcoin companies and that, for a time being, a small stable of big-name VCs are key to striking partnerships.
The result, according to Coinsetter CEO Jaron Lukasiewicz, is that bitcoin startups are increasingly divided into the "haves and have nots".
He told CoinDesk:
"With banks, there are three camps. One is banks who are completely not open to bitcoin, that's the majority. Then you have a small tier of fairly well-known banks that are not working with bitcoin companies, but they reach out and say 'We'll get there', and that's pending licensing. Then, there are a very small number of banks that will bank a company like ours."
"Most of the major banks have set policy to suspend operations with bitcoin-related companies until they understand it all better," he said.
The VC advantage
Statements from the ecosystem's most prominent investors suggest that they understand their value in the market, but that the current situation poses challenges for their firms.
For example, Bitcoin Foundation board member Brock Pierce's AngelList syndicate had pledged to invest in 12 bitcoin startups in 2014, but has to date invested in just two. He provided anecdotal evidence of just how rare stable banking is for startups, telling CoinDesk:
"If someone comes to me and says 'We have a banking relationships, we have ACH facilities', my immediate reaction would be I'm interested in it, because it's so difficult."
Vinny Lingham, bitcoin enthusiast and CEO of mobile gift card provider Gyft, explained that, in his personal view, the current environment favors bitcoin companies backed by leading VC firms.
The result is that Lingham framed the current bitcoin ecosystem as anti-competitive. Companies like Circle, Coinbase and Xapo that can raise the requisite funds to establish relationships, he said, can now push out smaller entrepreneurs, a sentiment echoed by Tai.
Further, Lands' personal story provides evidence of this bias. In the weeks that followed his firm's account closure, Lands claims he met with several banks and credit unions, all of which denied QuickCoin services.
"Most of them would ask us 'Who is your VC?', as if this was a requirement to have a bank account," said Lands, who is backed by a group of smaller investors.
Problems go beyond bitcoin
Members of bitcoin's investment community took a more realistic view of the situation, framing the frustrations of smaller startups as an understandable, and necessary, part of the ecosystem's larger growth.
SecondMarket chairman Barry Silbert, who has invested in more than 30 bitcoin companies personally and through his venture fund Bitcoin Opportunity Corp, expressed his wish that more bitcoin companies could get access to banking. However, he acknowledged that the ecosystem has developed a "Tale of Two Cities situation" where startups with name-brand investors are securing banking partnerships.
Silbert, however, chooses to focus on the positive implications of this development, telling CoinDesk:
"I'd rather see the banks get really comfortable with a subset of companies first and building their own process and knowledge to manage that relationship and then expand from there, versus them not banking anybody."
Pierce, too, suggested that far from controversial, these decisions make economic sense for banks.
"We get excited about our $1m revenue numbers, but from a bank's perspective, it's a miniscule amount of business. I'm not surprised they're moving slowly," he said.
Silbert and Pierce both asserted that companies with less risky business models were also becoming favored in the US. These include products and services built on top of the block chain infrastructure and that don't handle customer money.
Lukasiewicz suggested, however, that this bias only extends to certain types of money, mainly smaller transactions from consumers, adding:
"A lot of banks want to work with business-to-business transactions. When it comes to consumer-facing transactions, our bank has basically said we're not interested in that business."
Bank reluctance tied to regulation
Many of the experts CoinDesk spoke to, particularly more experienced VCs, were quick to caution that banks are in the process of learning about bitcoin. They noted that, while many aren't yet involved in the ecosystem, they are aware of the increasing number of merchants active in the space, as well as the potential, long-term business bitcoin could bring.
Wells Fargo told CoinDesk it is "learning more about virtual currencies and the potential rewards and risks."
Still, other commentators framed the banking industry's reluctance as due to regulatory factors.
Public statements by at least one smaller bank, Washington-based Peninsula Credit Union, support this notion, illustrating the considerations a wide number of smaller US banks may be making when approached by bitcoin businesses.
CEO Jim Morrell affirmed to CoinDesk that his company will not accept bitcoin businesses, because his firm doesn't work with any MSBs due to the extensive guidance his company would have to follow and the risk it would incur.
"It's not the concern about doing more work. That's where the decision-making comes down, is this an area we want to pursue right now? At this point, we don't have the strategic direction from our board to do that," he said.
Finding refuge overseas
Though recent news stories suggest otherwise, there is a broad perception that bitcoin businesses are better off banking abroad.
Pierce painted European countries as more favorable to bitcoin businesses, citing his past experience.
Silbert added that, while he is confident in the emerging market businesses he's invested in, some of those startups worry about their long-term ability to do business.
"A number of them have one relationship and only one relationship. They're certainly always concerned about the risk that one day they're going to get a phone call and they're going to lose that relationship."
Further, Silbert suggested that any advantage bitcoin companies have abroad may only be temporary.
"I would expect that some of these companies have banking relationships where the higher-ups of that bank either don't know that they have companies playing in the bitcoin space, or even don't know what bitcoin is, and frankly, that's what happened in the US," he added.
Time and persistence
Despite the challenges US bitcoin startups are facing, VCs agree that bitcoin's banking situation in the US remains a short-term problem.
Pierce is optimistic, concluding that persistence is the only path forward:
"If you go talk to hundreds of banks, you'll find banks that will experiment with you. A lot of guys, when you knock on 10 doors, you give up."
Lukasiewicz echoed those sentiments, noting that his company's funding and banking partnerships are a product of his own hard work and good fortune.
He suggested that, in retrospect, the trial by endurance he faced was successful at ensuring only the strongest companies survived. He recalled:
"Every step of the way somebody's been telling me someone's going to make a big announcement. I've heard this for so long. You meet them at the conferences, they come in and they start trying to raise funds and they can't do it, then they realize how difficult the banking situation is, then they say 'This is really hard let's go on to the next thing'."
Silbert believes this bottleneck won't last much longer. He highlighted how the major banks and investors he speaks with are increasingly positive about bitcoin, and went so far as to describe a future scenario where banks will compete to be the most bitcoin-friendly business.
However, the question remains, when will this interest translate into action and how many entrepreneurs will be deterred along the way?
"In the short term, the hurdle is very high, medium term the level will drop, and long term [the banks will] all accept bitcoin because they have to. How long is the short term? I don't know."
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