Below is a summary of some of the significant legal and regulatory actions that occurred over the past week. This alert is not intended to be a comprehensive list of all such developments, but rather a selection of publicly-reported news that may be of particular interest.
San Francisco. The Federal Reserve Bank of San Francisco (the “FRBSF”) published an article last week that provides guidance to community banks on the risks associated with virtual currencies. The article provides an overview of the virtual currency landscape, noting that entities that engage in virtual currency transactions, including issuers, exchangers, and intermediaries, are increasing in number. Since these entities will often require access to traditional banking services, the FRBSF recommends that community banks familiarize themselves with the risks associated with offering their services to these customers.
The FRBSF specifically flagged the categories of compliance risk, reputational risk, credit risk, and operational risk, with compliance risk being the most significant. According to the FRBSF, the frequent lack of visibility into virtual currency transactions makes it more difficult for banks to determine the legality of a customer’s activities. The article contends that this lack of transparency means financial institutions will need to engage in more due diligence and monitoring in order to understand a customer’s activities. And since the U.S. Financial Crimes Enforcement Network has designated certain virtual currency related activity as money transmission, the FRBSF suggested that banks are expected to monitor these entities as they would other money transmitters, with heightened due diligence expectations.
The FRBSF also advised banks to consider the reputational risk associated with doing business with a failed virtual currency customer, such as Mt. Gox; credit risk associated with securing loans with virtual currencies; and operational risk associated with owning virtual currency. With respect to credit risk, the FRBSF advised banks to carefully craft loan agreements so that in the event of default, the bank will have access to the borrower’s virtual wallet. To mitigate operational risks associated with owning virtual currency, the FRBSF advised banks to liquidate the currency as soon as possible and maintain internal controls to deal with the risk of loss.