By Jon Matonis
Saturday, March 2, 2013
Although the deal for Mt. Gox bitcoin exchange and CoinLab to partner on U.S. customer business was brokered by Seattle-based CoinLab, it would not have been possible without a solid and willing financial institution in the United States.
Innovative Silicon Valley Bank
stepped up to the plate and agreed to facilitate the U.S. dollar
financial flows for individuals and businesses managing trading accounts
on bitcoin's largest
floating-rate exchange. For better or worse, this launches the exchange
directly into the world of the Department of the Treasury's Financial Crimes Enforcement Network
(FinCEN) as SVB already adheres to those strict reporting requirements.
"Like any new business we are looking at it very carefully and we are
willing to entertain the idea while monitoring the industry closely," says Carrie Merritt, director of public relations at SVB.
Mt. Gox sees about 80 percent of their traffic originating from North
America. The new deal should vastly improve the speed of Mt. Gox account
setup and funds clearing which improves overall liquidity.
Additionally, with a bank in the U.S. providing smooth transfer of
funds, it paves the way for hedge funds and other institutional
investors to enter the market because investment charters can sometimes
limit new placements to U.S. entities only.
Speaking to Forbes,
CoinLab CEO Peter Vessenes explained that the exclusive 10-year deal
will bring "a specialized user interface to the Mt. Gox platform and
facilitate larger transaction sizes for better liquidity, maybe even
adding forex trading APIs and FIX protocol support." Structurally,
with CoinLab providing back-end clearing services and local customer
support, Mt. Gox eliminates the need to open a U.S. subsidiary on their
own which would have involved a significant investment in administrative
Despite the fact that foreign dollar deposits are already held at correspondent money center banks in New York,
the centralized and unfettered enforcement access to customer data
becomes the single greatest aspect of this new deal. The move to
domicile in the U.S. may prove counterproductive if bitcoin trading
volume is driven to smaller, less regulated offshore exchanges.
cryptographic money, bitcoin is not recognized as legal tender in any
jurisdiction so exchanges are technically not considered to be 'foreign
currency dealers' nor is bitcoin officially recognized as a 'prepaid access' device. Nonetheless, CoinLab took the step last week of registering with FinCEN to become a Money Services Business (MSB) and their entity and registration number are available here. Since they are a self-declared seller of prepaid access (MSB code 413), they now must comply with a litany of Bank Secrecy Act requirements, including Suspicious Activity Reporting.
to Vessenes, the arrangement involved several high-level discussions
with Silicon Valley Bank on the legalities and merits of entering the
bitcoin business. Asked if the federally-chartered, FDIC-insured banking
partnership would mean fewer compliance responsibilities for CoinLab,
Vessenes replied, "I wish. We will be increasing both compliance and
customer support staff in the coming weeks." He added that, "CoinLab's
new Anti-Money Laundering (AML) program and Know Your Customer (KYC)
controls will be reviewed periodically by Silicon Valley Bank and
certain employees will have to complete regular AML training."
Gox grew to its current size before the strict regulatory framework
advanced around them and they genuinely seem like a reluctant
participant in the strenuous and exhausting labyrinth of compliance
measures. Although a more free market approach would have been to
establish banking relationships in a variety of jurisdictions and
challenge the perceived status of bitcoin trading as "currency
trading," I don't get the sense that they intend to use the issue of
regulation and a licensed U.S. bank as a tool for competitive advantage.
more likely that Mt. Gox's local banking partners did not want to be
involved with such a large U.S. customer base requiring adherence to the
U.S.-led Foreign Account Tax Compliance Act (FATCA) monitoring and reporting regime. Japan has agreed to become FATCA compliant by 2014.
For the U.S. citizens that make up the majority of the exchange's customer base, FATCA ensures
that it doesn't really matter where they maintain customer fund
accounts, so for those customers the deal primarily improves transfer
fees and clearing time for U.S. dollar funds. Mt. Gox's non-U.S.
customers (except Canadians) are not affected by the change and they continue with
procedures as before the announcement.
The transition of customer
business from Mt. Gox to CoinLab involves three phases and yes it will
include Canadian customers too. Phase one is alpha with about 100
customers starting in a few days, phase two is beta with 5,000 customers
on March 15th, and phase three is all accounts going live on March
29th. Account transitions are voluntary for customers, otherwise
affected accounts will be closed. All trade matching will still occur on
Mt. Gox systems.
Mark Karpeles is Managing Director at Mt. Gox, part of Tibanne Co. Ltd. (Japan), which is self-funded without venture capital. Peter Vessenes as CEO of CoinLab, Inc. previously took $500,000 in start-up funds to leverage bitcoin mining opportunities for gamers. Greg Becker is President and CEO at Silicon Valley Bank.