Bitcoin Exchange Deal Repatriates Assets To U.S.

By Jon Matonis
Forbes
Saturday, March 2, 2013

http://www.forbes.com/sites/jonmatonis/2013/03/02/bitcoin-exchange-deal-repatriates-assets-to-u-s/

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.

Japan-based 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 overhead.

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.

As nonpolitical 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.

According 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."

Mt. 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.

It's 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.