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Representatives from several bitcoin businesses told a panel of state banking regulators today that the current regulatory environment is making it difficult for them to build partnerships with banks.

Executives from BitPay, Xapo, SecondMarket and CoinX spoke before a meeting of the Conference of State Bank Supervisors (CSBS) Emerging Payments Task Force in Chicago.

During a roughly two-hour hearing, these bitcoin industry representatives suggested that without clearer and supportive regulatory standards, bitcoin companies will continue to be held back in the broader consumer marketplace.

Bryan Krohn, BitPay’s chief financial officer, told the panel that the current regulatory environment makes it difficult to do business with a bank in the first place, saying:

"Banks are just backing away. The cost for doing this is too burdensome, and they just say no."

The panel members agreed that aligning regulations for bitcoin businesses with those applied to traditional money services businesses (MSBs) would help alleviate the situation.

Too risky for banks

Megan Burton, CEO of digital currency exchange CoinX, told the task force that regulatory uncertainty impairs communication between bitcoin businesses and banks.

She remarked that more clarity would improve the situation, saying:

"There needs to be a bridge between where we are as a MSB in a high-risk category and where the banks are, and how they’re being regulated, to be able to facilitate better communication between the two."

Annemarie Tierney, general counsel and legal EVP for SecondMarket, told the panel that the high-risk profiling recently cost the company a long-time banking relationship.

She said:

"[The bank] gave us notice yesterday that they wanted to end that banking relationship, in part because our transitions around bitcoin, even though we’re not an MSB or an exchange, [it] raised our risk profile and it was too much work for them to figure it out."

Tierney added that the termination was "very, very discouraging" for the company.

Compliance holds banks back

The panel told the task force that, despite these challenges, banks have expressed interest in the technology underlying bitcoin. Still, issues with regulatory compliance make banks wary of the potential costs of investing in or integrating digital currency.

Karsten Behrend, chief compliance officer for Xapo, said the company has spoken with banks about the aspects of digital currency and how the technology could be leveraged for their clients. He remarked that doing so has helped Xapo educate potential banking partners on bitcoin.

Burton added that CoinX demoed her company’s exchange technology to two US-based banks in September 2013. However, the banks passed on any involvement with the technology because of the perceived high risk.

She explained:

"Once we did a demo of the system, the platform and the exchange in particular. They were fascinated as to how we can extend this to our consumers.

Ultimately, they came up against a roadblock that, because of the risk profile, it would put additional scrutiny that they would not be able to handle within their organization."

Members of the task force, at the conclusion of the hearing, suggested that a national banking regulatory standard for digital currencies could be developed.

The group said that it would publish its findings later in the year as it moves toward potentially establishing new or modified guidelines for bitcoin businesses.

Conference meeting image via Shutterstock

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