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Awaiting guidance, community bank prohibits cryptocurrency transactions


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Awaiting guidance, community bank prohibits cryptocurrency transactions

A Michigan-based community bank decided to prohibit cryptocurrency transactions until regulators provide further guidance about how they comply with anti-money laundering provisions.

Cryptocurrencies like bitcoin have attracted recent media attention as valuations have soared, garnering the interest of a broader group of consumers and customers interested in purchasing the digital assets. But County Bank Corp unit Lakestone Bank & Trust has decided to sit out the excitement until regulators provide more guidance on these transactions.

In a Dec. 14 letter, Lakestone informed a customer that it had noticed the customer's account was transacting with, a digital currency exchange. The letter, which was posted on micro-blogging site Twitter, said these transactions were against Lakestone's policies and would need to be discontinued immediately. The account would also receive further monitoring and could be closed if the activity continued. Chairman and CEO Bruce Cady confirmed the letter's authenticity and said Lakestone's Bank Secrecy Act policy prohibits opening accounts for new money services business.

Cady said the bank cannot tell if someone engaged in cryptocurrency transactions qualifies as a money services business, which can generate extra scrutiny from internal BSA/AML programs. "Until we get some additional guidance or any guidance from our prudential regulators, we've opted not to allow using Lakestone accounts to buy and/or assist in acquiring any cryptocurrency," he added.

He said there has been insufficient demand from existing or potential customers, so the bank decided against adding the additional cost of monitoring activity of sites that conduct cryptocurrency transactions or other money services businesses.

He also said that regulators have not issued further guidance on how banks should handle these transactions. Lakestone is regulated by the Michigan Department of Insurance and Financial Services, and its parent company is regulated by the Federal Reserve Board. The Michigan Department of Insurance and Financial Services has not issued guidance for banks on cryptocurrency transactions, and public information officer Andrea Miller wrote in an email that she was not aware if anyone at the agency was studying the issue.

For now, the Federal Reserve is relying on existing BSA/AML provisions and regulations for banks that process cryptocurrency transactions, said chair Janet Yellen at her Dec. 13 press conference.

"Bitcoin at this time plays a very small role in the payment system," she said. "It is not a stable source of [stored] value, and it doesn't constitute legal tender."

Yellen also said she believes bitcoin poses "limited" financial stability risks, given its lack of exposure to the banking sector.

Cady pointed out that other bankers have also been skeptical of cryptocurrency. Recently, JPMorgan Chase & Co. Chairman, President and CEO Jamie Dimon called bitcoin "a fraud," but the bank still reportedly gauged client demand and the potential risks of facilitating client trades in CME Group Inc.'s planned bitcoin futures contracts.