Startups focused on products and services based on bitcoin have never had an easy time opening bank accounts – or maintaining positive relationships with those firms.
The problem? Bitcoin-related clients are frequently viewed as high-risk by banking institutions, and thus far few banks have shown an interest in going through the process of mitigating that risk.
This is a long-standing issue that has sparked controversy in the past, but given the broader issue of de-risking by banks worldwide, it's perhaps unsurprising that bitcoin startups would find themselves in the crosshairs of bank compliance departments.
Yet those risks haven't kept every bank from opening its doors to bitcoin startups. Silvergate Bank, based in La Jolla, California, was one of the earliest institutions to buck that trend.
Silvergate is on the verge of opening its sixteenth bitcoin bank account, and its chief executive officer, Alan Lane, says the benefits of his bank's early adopter status might be in jeopardy.
Lane told CoinDesk:
"If other banks are shying away from this, it probably wouldn’t be that difficult to generate business if they could create a compliance process that worked."
The process of developing this kind of more inclusive compliance process – and as a result helping to ease concerns over the perceived risk of bitcoin businesses – began in 2013, according to Lane, who previously oversaw Silvergate’s manufacturing and retail accounts, ranging in size from $10m to $50m in annual revenue.
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Lane, who calls himself a "Joe-six-pack kind of guy" as opposed to a coder, was originally only interested in bitcoin on a personal level.
He made his first bitcoin purchase using Coinbase in mid-2013, looking to enable an ACH transfer and learn more about the process of actually obtaining and using a digital currency.
That research allowed him, he explained in interview, to trace the transaction backwards to Silicon Valley Bank, one of the first institutions to bank with bitcoin.
Seeing that Silicon Valley Bank – known for its forward-looking stance on technology – was involved in bitcoin revealed the positive potential for doing business with those kinds of startups, he said.
By the end of 2013, Silvergate had received its first referral for a bitcoin client. In the middle of the following year, the bank was in conversations with "several" bitcoin clients, all of whom wanted to open accounts, explained Lane.
But thorny questions lingered. For example, were those bitcoin clients too risky? Would the cost of opening accounts and on-boarding them into the bank pay off in the end?
Despite the perceived uncertainty in doing business with bitcoin startups, Lane said that the regulations related to that process are actually quite clear.
To help answer those lingering questions, Lane set up a bitcoin working group composed of five Silvergate employees and tasked them with learning what the bank would need to do to accept bitcoin accounts.
"It was a matter of starting to read the appropriate rules and regulations," said Lane. "And along the way continuing a dialogue with the companies we had started talking with."
Perhaps surprisingly, a large part of the due diligence for opening an account for a typical bitcoin company isn't that much more demanding than a non-bitcoin company, Lane explained. Most of that research, including on-site visits to those startups' offices “to make sure they are who they say they are,” is standard for corporate clients.
The regulatory requirements Silvergate follows don’t dictate that the bank audit every transaction, but according to Lane, that "we have confidence that you have confidence" in who are the account holder’s clients. An analysis of the potential client's customer verification process — how the company confirms its own clients identities — is good enough, he said.
Complications arise with companies requiring additional licenses, such as money-transmitting firms. Before Silvergate started accepting bitcoin startups, Lane explained, the bank didn't work with those kinds of companies.
"This is where Silvergate had to evolve our compliance view of things," he said.
In August 2014, Lane officially informed the bank’s annual auditors it was exploring business opportunities with bitcoin startups. From there, a joint meeting was held with representatives from the Federal Reserve Bank of San Francisco and the California State Banking Department to help ensure compliance.
In total, Lane estimated that, based on the salaries paid to each of the five working group members who developed Silvergate's bitcoin strategy on a part-time basis over 18 months, the bank has invested about $250k to learn what it would take to open its first bitcoin account.
Currently, Silvergate has 15 bank accounts open for bitcoin companies that include Palo Alto, California-based bitcoin vault Xapo and another "half-dozen" clients in varying stages of the due diligence process. Silvergate is not currently sharing the names of its other clients, which typically begin with a basic account, that receive more advanced features later.
A well prepared bitcoin firm that has answers to all Silvergate's questions can get an account in between 30 days and 60 days, he explained.
Despite these positive signs from one bank, the reality is that most bitcoin startups face considerable hurdles. The troubles seen in countries like Australia further illustrate this problem.
A recent report from the non-profit advocacy group Coin Center highlighted that lack of access to bank accounts for bitcoin startups as having a "devastating" impact. The average time to on-board a digital currency company is between 6 months and one year, according to Coin Center's findings – assuming the account is given in the first place.
In interview, Lane expressed concern that the banking industry's move towards describing some bitcoin companies as blockchain companies could stymie the benefits he’d hope Silvergate would achieve by being an early mover.
Instead of seeing a flood of new bitcoin businesses, the application rate is plateauing, he said. And he warned that the perception that blockchain companies were “less toxic” than bitcoin companies was likely not a trend that would continue.
"For those who are really dealing with bitcoin and calling it blockchain, that’s short sighted," he said. "All of a sudden, their banks are going to wake up and they’re going to get their bank account shut down."
Lane went on to conclude:
"Even if you think you're focusing more on blockchain it might still behoove you to try to find a bank that is willing to bank bitcoin companies so you can take that worry away."
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