Ominous comments like the following are turning up more frequently these days in online financial forums:
“Today I received notice that my personal Chase [bank] account which I’ve had for 10 years is going to be closed. I logged into their online banking and sure enough my entire history and all accounts are gone. I went into my local branch to get my money and they told me my account was [already] closed and my money would be sent to me by mail. The branch manager said the reason for the account closure was most likely ‘my Bitcoin stuff.'”
Reading this raises immediate red flags: Can your bank close your accounts without notifying you beforehand? Can the bank justify its actions without a formal explanation? What about the resulting bank fees, automatic payments that are missed, and the fees and penalties they incur?
We’ll explore answers to these questions, but first let’s familiarize ourselves with this “Bitcoin stuff.”
A new form of commerce
Bitcoin is a digital currency which allows transactions to be performed without banks or any other middlemen. Transactions from consumer’s wallets are processed, verified and publicly recorded by so-called Bitcoin enthusiasts. And, there aren’t any transaction fees.
People can purchase Bitcoins, keep them in their digital wallets and use them to pay for goods or services by transferring Bitcoins through Coinbase or Bitpay. However, since they are not regulated, you can’t insure your “wallet.” Importantly, only your wallet ID is stored on the public log, not your real name. This type of anonymity makes Bitcoin a favorite payment option for illegal activities.
Rules are still to be written
Despite the intriguing possibilities of Bitcoin, an unclear regulatory landscape is problematic. The former director of the U.S. Mint Edmund Moy says there’s disagreement on the definition of digital currency:
“Bitcoin is not just one thing. It’s not just currency, it’s not just a payment system, it’s a protocol — there’s multiple things that cross over into many different turfs of government.”
Because of this, Federal Reserve chairwoman Janet Yellen recently said that the Fed lacks the legal authorization to regulate digital currencies. She noted that it would be “appropriate” for Congress to investigate Bitcoin and potential legislation governing it.
New York takes a step toward regulation
New York is the first state to propose issuing separate regulations for virtual currencies, demonstrating its importance. New York City is home to several startups dealing in Bitcoin, and some Wall Street firms are edging into the field as well.
The currency exchange itBit said it intended to fully comply with regulations and said it applauded New York’s “thoughtful and transparent approach.” SecondMarket, a Wall Street firm that runs a Bitcoin Investment Trust, said the rules “will help promote further adoption of digital currencies by both consumers and investors alike.”
Bitcoin advocates disagree
On the other hand, Jim Harper, Washington-based global policy counsel at the Bitcoin Foundation, said some provisions of the regulations would be a heavy burden on Bitcoin businesses.
But most importantly, Harper said it’s unnecessary to issue licenses specific to a certain technology.
“The preference would be for there not to be a special Bitcoin license but simply to integrate Bitcoin into financial services,” he said.
The Banks and Bitcoin
That’s exactly what banks hostile to Bitcoin like Chase, Comerica and others are so adamant to prevent. These institutions intend to protect their checking, savings and credit card account activities which are directly threatened by the new technology.
JPMorgan Chase is busy developing its own alternative to Bitcoin, according to a recently published patent application. It proposes a computer-implemented method of making payments anonymously “without provision of an account number or name from the payer.” It includes digital wallets, “web cash,” and the ability to transfer funds virtually to anyone as easily and quickly as sending an email. It’s the mirror image of Bitcoin.
However, payments will still be processed through the existing electronic transfer fund networks in use now. Also, Chase’s e-wallets will be stored on a “host web server,” presumably under the bank’s control. Bitcoin, on the other hand, thrives on decentralization by exchanges without network
And Bitcoin transactions are stored on Blockchain, the record keeper shared by all nodes participating in the Bitcoin protocol-based system. That’s what makes this digital currency revolutionary.
Protecting your banking activity
So clearly we can’t expect the banks and Bitcoin to play nice together for the immediate future. One obvious sign of that is the surprise sprung on the Chase Bank customer whose financial forum blog we started with.
Strange as it may seem, your bank does have the contractual right to close your account without formal explanation. Its rationale may well be engagement in “Bitcoin activity,” which can be interpreted under Homeland Security banking laws as some form of potentially illegal currency exchange.
And, if you haven’t noticed that in the small print in your account contract, you’re also likely to have missed the stipulations for fees and penalties you pay for breaking the rules. What’s more, if the account closure results in the failure of automatic payments to other accounts, you are also responsible for those fees and penalties.
Your best protection in this environment is self-protection. Get with your banker and learn all the procedures, rules and fees associated with your accounts. Sign up for immediate account updates via email. And constantly monitor your money through the use of online account statements.
Alternatives to traditional banking
Taking a longer view, it’s also time to consider other ways to manage your finances and conduct your personal business. Particularly if you’re going to deal in new forms of commerce like Bitcoins, you want to customize your financial activities to the appropriate forms of exchange. You also want to spread your finances over an array of accounts, both online and traditional, banks and credit unions. Find out how much money you might end up saving over time with a savings rates calculator.
Credit unions can be economical and convenient alternatives for virtually all banking services. Rates for borrowing are lower across the board while rates for saving are higher. And membership rules are far more liberal than ever before.
For more serious financing, crowdfunding allows groups and businesses to shun the big banks and still raise money for a variety of projects. And the growing practice of micro-finance can be another approach. Widely-used overseas, this small scale lending can finance many ventures and situations.
Today’s personal finance means keeping a close watch on your accounts, managing your money by spreading the risk across several institutions, and taking advantage of banking alternatives, whether micro-finance, crowdfunding, or by simply joining your local credit union.