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Money Transmitter Bonds for Cryptocurrency

Understanding the requirements and underwriting considerations for money transmitter surety bonds in a cryptocurrency environment

cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets. According to Wikipedia, Bitcoin is generally considered the first decentralized cryptocurrency. Since the release of Bitcoin, over 4,000 altcoins (alternative variants of Bitcoin, or other cryptocurrencies) have been created. This post will cover some of the unique challanges to obtaining money transmitter bonds for cryptocurrency.

A Money Transmitter Bond is a type of surety bond required by the individual states. The federal government, forty-seven states, and the District of Columbia all require licenses for money transmitter businesses. These licenses have bond requirements as part of the licensure.

money transmitter bonds for cryptocurrency

If a money transmitter was to be licensed in all 50 states, the minimum bond penalty would be $8,000,000. While the definition of a money transmitter varies from state to state, in general a money transmitter is any person or company that:

  • Sells or issues payment instruments.
  • Engages in the business of receiving money for the transmission of, or transmitting money.
  • Engages in the business of exchanging payment instruments or money into any form of money or payment instrument.
  • Engages in the business of receiving money for obligors for the purpose of paying that obligor’s bills, invoices, or accounts.

In october of 2014, the Financial Crimes Enforcement Network (FinCEN), of the United States Treasury Department determined that ” bitcoin exchanges may be money transmitters, even if they only match buyers and sellers on their platform. Further, the letters suggest this is true, even if the exchanges behave more like traditional securities or commodities exchanges, where no money is transferred between the company and any counterparty.” Bottom line, just because one is using cryptocurrency does not relive one of the requirement to be licensed as a money transmitter.

Unique challenges to obtaining money transmitter bonds for cryptocurrency

There are dozens of surety bond companies willing to provide bonds for money transmitters yet there are only a handful of companies willing to provide the money transmitter bonds for cryptocurrency. Why is that? Two main reasons; First, cryptocurrency is relatively new. The surety industry is not one to openly accept new things. I have a book called The Handbook of Surety and Fidelity Bonds that was published in 1928. Reading it what strikes me is how little the surety industry has changed in the last 90 years. As such, introducing a completely new currency that is not backed by a government will take years and years to be widely accepted as a real thing that can be underwritten by the surety industry at large.

The second reason is a real underwriting concern. The very nature of a cryptocurrency lends itself to nefarious dealings. According to a study published by Oxford University;

“We find that illegal activity accounts for a substantial proportion of the users and trading activity in bitcoin. For example, approximately one-quarter of all users (25%) and close to one-half of bitcoin transactions (44%) are associated with illegal activity. The estimated 24 million bitcoin market participants that use bitcoin primarily for illegal purposes (as at April 2017) annually conduct around 36 million transactions, with a value of around $72 billion, and collectively hold around $8 billion worth of bitcoin.”

The purpose of the money transmitter bond is to guarantee that the money transmitter is not involved with illegal activities. As such, if we have a currency that is widely used for illegal purposes, this fact alone increases the risk of loss to the surety. additional underwriting scrutiny will be necessary to obtain money transmittor bonds for cryptocurrency.

Underwrting requriments for money transmitter bonds for cryptocurrency

Given the increased risk mentioned above, additional scrutiny towards the type of business, experience in that business, and backgrounds of the individuals involved will be required as part of the underwriting process. evidence that the business is not in anyway associated with any type of illegal activity will be required. Resumes on the key individuals should be provided to the underwriters and a more rigours background check of these individuals may also take place as part of the process.

Financial wherewithal to support the bond penalties will also be a paramount considerations. If the minimum bond amounts for money transmitter bonds for cryptocurrency could be as high as $8mm (if licensed and bonded in all states), the company and/or individuals behind the company will have to qualify for $8mm in bonds. A surety bond is not insurance. If the surety suffers a loss it will look towards its indemnitors to hold it harmless. As such the financial capacity to accomplish that will be a consideration.

To apply for a money transmitter bond, click here for Surety1’s easy to use, online application. 





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