Bitcoin Exchange Tradehill Cuts Ties with Bitcoin-Savvy CU

Tradehill Inc., a Bitcoin exchange, has ended its relationship with Internet Archive Federal Credit Union—announced only a few days earlier—and has suspended trading, blaming regulatory issues.

"Tradehill has temporarily suspended trading due to banking and regulatory issues," says Robin Kunimune, public relations manager at Tradehill. "We are also in the unfortunate position of having to end our developing relationship with IAFCU due to IAFCU having operational and regulatory issues."

Tradehill sent letters to its customers on Aug. 29. A corporate client of Tradehill's confirmed receiving the letter.

IAFCU had garnered attention lately as one of the only Bitcoin-friendly financial institutions in the U.S. It agreed to provide accounts to Tradehill, whereas other financial institutions turn down companies working in Bitcoin and others unexpectedly drop bank accounts belonging to Bitcoin businesses.

"Tradehill's integration with IAFCU allowed for clients to buy Bitcoin with a balance in an account with their own name," Kunimune says. "This allowed clients to trade Bitcoin with funds that were stored in a federally insured institution."

The problem with a credit union picking up a Bitcoin business is that credit unions are supposed to serve individuals, although some are extending their services to businesses of individuals, says Pervees Faisal Islam, director of Centra Payments Solutions, a payments compliance provider. Credit unions, which in general are exempt from paying federal income tax, have different regulators and requirements for taking on business members.

"If people think credit unions are more accommodating than banks it's very different…credit unions are much more conservative than banks are," Islam says.

The relationship could put the credit union's federal charter at risk, says Islam, although there are other models that could work better for these types of relationships.

One model that could lead to a successful Bitcoin/credit union relationship is if the Bitcoin business provides a service to the credit union, which in turn provides that service directly to its members, Islam says. "If the credit union was using another company's software to provide Bitcoin services to its members directly…there's a higher probability of success," he says.

But these models have yet to be tested.

IAFCU declined to comment on the status of any specific member.

"Our credit union has worked within the evolving regulatory environment, which has not always been easy," says Jordan Modell, CEO of IAFCU, in an Aug. 29 blog post. "This is a long not a short road and sometimes with detours. Until we get further clarity, we are unable to service some of our corporate members."

Tradehill's website has been updated with a notice informing customers that it has suspended service.

"Bitcoin companies getting shut down by banks and credit unions in the U.S. is becoming a repetitive event unfortunately," says Islam. "One of the reasons I have been able to pinpoint is that payments startups are almost entirely borne of self-learned coding.  This age of self-learned coding gives the impression that self-learned lawyering is also possible, and that's simply not true."

Tradehill plans on consulting regulators and banks to "define the most appropriate licensing strategy for our current, and future business practices," says Kunimune.

While Tradehill is registered with the Financial Crimes Enforcement Network and acknowledged working in most every state in the country on its application, this action resides outside the state-by-state licensing process. Tradehill has not obtained licenses in any state.