Bank crackdown forces NZ cryptocurrency exchange offline

Local cryptocurrency exchange Token Room will stop selling bitcoin and other virtual currencies at 9pm tonight.

“Token Room regrets to inform you that our current banking provider has decided they will not be maintaining a banking relationship with us, forcing us to cease sales,” says a message on the company’s home page.

The abrupt halt to business will frustrate a fast-growing user base that has grown to about 2800 since Token Room opened on December 3, director Shelly Robinson says.

A second local exchange, Cryptopia, was in the same position but has won a temporary reprieve from its bank until March 31. A third exchange is also having issues with its bank, but unlike Token Room and  Cryptopia, it won't confirm its situation.

Token Room founder Paul Robinson won’t name the bank that his caused his site’s closure, as he does not want to prejudice his chances of working through the issue.

However, Richard MacManus – who covers the local and international crypto scene via his Blocksplain blog, says ASB’s name has been mentioned in the tightknit virtual currency community.

ASB parent CBA has recently been under regulatory heat across the Tasman, with regulator AUSTRAC alleging in mid-December that its anti-money laundering and counter-terror systems were not up to scratch.

Mr Robinson says he was upfront about the nature of his business before it opened on December 3, and indeed says he’s been 100% transparent. He says he took legal advice about complying with New Zealand’s Anti-Money Laundering and Countering Financing of Terrorism Act (2009) – popularly known as AML -- and was disappointed when Token Ring’s bank declined an offer to review its internal documentation.

Although his bank didn’t explicitly say it, Mr Robinson got the impression it thought his business was too high risk, in legal and AML compliance terms (as opposed to too high risk in financial terms).

The Token Ring founder cites comments by the UK Treasury that cryptocurrencies pose a low terrorism financing risk. The UK Treasury did make those comments in October, but in December it also said it would assist in an EU-wide crackdown on cryptocurrency exchanges in an effort to comply with money laundering and counter-terror laws – specifically by making traders disclose their identity.

Mr Robinson says the blockchain technology that underpins bitcoin and records every transaction makes it more transparent than any other currency. That’s true, to a point. During the WannaCry worldwide ransomware attack, anyone could see how much ransom money was going into the attackers bitcoin accounts as various victims decided to pay up – there were even Twitter accounts devoted to real-time tallies. Yet no-one knew who controlled those accounts.

The Token Room founder doesn't like the focus on bitcoin being the favoured currency for ransomware makers. He says a lot of the talk is rhetoric, and out of date.

Token Room founder Paul Robinson: His local cryptocurrency exchange has gained 2800 users since opening on December 3.

Banks respond
ASB would not confirm or deny if it had a relationship with Token Room, citing a policy not to comment on individual customers.

However, the bank did offer the broader statement that “ASB does not have concerns regarding cryptocurrency exchanges generally.

“However, like all banks, ASB is operating in a complex regulatory environment which includes anti-money laundering and counter-terrorism financing laws that affect banking relationships with our customers in various ways.

“Ultimately, our goal is to keep our customers safe when business models evolve, as is happening rapidly in the cryptocurrency area.”

Westpac took a harder line, telling NBR that a business like Mr Robinson's was a non-starter, as things stand.

"Westpac is exploring ways it can facilitate banking services for cryptocurrency businesses in the future but at present, it cannot provide banking for those businesses operating as a cryptocurrency exchange," the bank said through a spokeswoman.

"The regulatory environment in which Westpac operates is complex and takes into account laws around anti-money laundering and the financing of counter-terrorism, among other regulations with which we must comply, both here and overseas."

Mr Robinson says he’s optimistic Token Room can work through its issues with its bank, or sign a new bank, in as little as one to two weeks – then renew his four-person operation.

However, the situation for all parties is complicated by the fact that our AML legislation was written in pre-bitcoin times. One bitcoin industry staffer sent NBR copies of email correspondence with Treasury and IRD that indicated both agencies were still at the early stages of grappling with cryptocurrencies, too.

ASB sounds like it has positive intentions, at least, but Mr MacManus says the feedback he's got from one of the exchanges is, "They’re not getting a lot of information back from the bank about what they should do to fix this."

Why a local exchange?
Banks forcing local exchanges offline won’t stop Kiwis buying and selling bitcoin and other virtual currencies.

But Wellington bitcoin commentator and investor Richard MacManus says it’s easier to trust a local exchange.

And indeed, unlike some global exchanges – where it can be hard to see who is running the show – Mr Robinson puts a photo of himself on Token Room’s site and he’s easy to find on LinkedIn (his day job is programme planner at Contact Energy). He’s an earnest, informed advocate for cryptocurrency, who’s accessible to media.

For his part, Mr Robinson says his exchange – at least, until 8pm tonight – offers instant results in a crypto-world where there are frequent complaints about slow or failed transactions. He also pushes the fact that Token Ring offers hardware wallets, or gadgets that people can carry around and connect to any computer (such real-world “wallets” are not a necessity, but get around the problem of people forgetting their crypto-keys and losing access to their virtual money).

His second key selling point is lower fees. 

Again, that will only be until this evening, but Mr Robinson is optimistic tonight's closure will prove a temporary blip.

POSTSCRIPT: A buying opportunity?
This story is one about the security of cryptocurrency exchanges, and their ability to comply with laws around money laundering and the like.

However, while NBR had Mr MacManus on the phone, it could not help but ask about the blogger-millionaire’s recent comment on social media that bitcoin’s current price represents a “buying opportunity.”

The Wellingtonian stands by that statement, but only for people who are investing money they can afford to lose. “It is risky. I haven’t bet my house on it,” he qualifies. He's particulary wary of ICOs or initial coin offerings.

Bitcoin bulls point to the fact bitcoin mining will stop once there are 21 million “coins” in existence, with some seeing that cap pushing the value to one US dollar to $US150,000.

Bears point to growing regulatory hassles and the fact that bitcoin isn’t the only game in town. Hundreds of virtual currencies have emerged, giving speculators multiple targets.

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