Bitcoin is on the rise as a payment platform, but banks in the U.S. are wary of entrepreneurs dealing with Bitcoin as an exchange or as a payment method. Will this spell trouble for the new decentralized currency?

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Bitcoin is gaining popularity as a payment platform, and in its dollar value itself is rising. As of most recent exchange rates, one bitcoin is equivalent to at least US$400. However, Bitcoin is quite a volatile currency, and its value is easily affected by external factors like demand and the current Bitcoin-related business environment.

The use of Bitcoin has been cast into bad light after the Silk Road e-commerce portal raids, especially because the secure and encrypted digital currency has been the funding method of choice for many black market operators. The Federal Bureau of Investigation actually confiscated 144,000 Bitcoins (then valued at about $28.5 million), which it intends to auction back to the market after court proceedings.

The digital currency is taking another hit, however, and this time it’s from the US financial sector. Banks in the US are reportedly turning away clients who are dealing in Bitcoins, and even those that have a hint of “bit”, “coin” and other combinations, thereof, in their business names. For example, Forbes cites the case of Coinabul, a San Diego-based trader of Bitcoins and precious metals. These entrepreneurs were asked to close their account, and a bank compliance officer told them it was doing the same for all small clients who deal in the currency.

The same goes with Bitinstant. CEO Charlie Schrem says he had been turned down by Chase, Wells Fargo, Citibank and US Bank, among others, and these banks are also banning the same clients from opening both personal and business accounts.

“Starting this summer, almost every U.S.-based startup who previously had banking was cut off if the word ‘bitcoin’ was mentioned, including simple checking for payroll and operational expenses like utilities and rent in USD,” said the Bitcoin Foundation in a statement. “The upcoming congressional hearings are timely as banks are unable to accurately asses risks without clear guidelines – leaving entrepreneurs bank less and forcing innovation overseas.”

Some companies are moving offshore in order to mitigate the “murky, unpredictable and onerous” policies and regulatory environment that the American financial system is espousing. Stakeholders from within the banking industry say that “clearer regulation” is required when dealing with virtual currencies. The anonymity, frictionless transactions and easy transfer across borders are beneficial for trade. However, the same benefits seem to be raising concerns among regulatory agencies, understandably due to their aversion to money laundering schemes.

The FBI itself says there is nothing intrinsically illegal with Bitcoin, but it’s the potential for illegal transactions that is concerning. “Bitcoins are not illegal in and of themselves and have known legitimate uses,” the agency notes in its criminal complaint against Silk Road. However, banks are still wary about the currency, and the financial sector is still trying to get comfortable with the idea of businesses dealing in such a decentralized currency with no established risk profile.

Of course, there is the question on why businesses will still need the help of banks for transactions, given Bitcoin’s digital nature. Perhaps banks are wary of their own obsolescence, in case currencies like Bitcoin dominate in the future.

Source: Forbes