Although the landscape is evolving, many states are requiring Cryptocurrency Bonds for individuals and businesses who transit “money”, or in this case cryptocurrency (Crypto). Learn what these bonds guarantee and how surety bond underwriters view them.
Cryptocurrency or Crypto is a type of digital currency or money that relies on a decentralized medium such as a blockchain instead of a centralized agency or government. These digital ledgers record and verify transactions. The currency is often referred to as “coins” or “tokens”. Cryptocurrency has many advantages including being secure, efficient and cost effective.
A Cryptocurrency Bond usually refers to a money transmitter bond required by a state to ensure that a licensed person or company pays all monies owed and follows the rules and regulations of such licensing. The bond serves as a financial guarantee to protect those using the crypto transmitters services. Each state requirement for these bonds is different or silent.
Whether a licensed individual or business needs a Cryptocurrency Bond is a complicated question. The Crypto industry is still relatively new and both states and the U.S. Government is still developing regulations. Some states such as New York have very specific and defined laws for those involved in a Virtual Currency Business. Other states are silent on this issue.
On a Federal level, the Financial Crimes Enforcement Network (FinCEN), which is a division of the Treasury Department, regulates money services businesses. The Anti Money Laundering Act of 2020 and in turn updates to the Bank Secrecy Act, specifically puts Crypto money transmitters under its authority by making all transactions involving “value that substitutes for currency” subject to money transmitter registration and reporting requirements.
While each state law is different, we can use some common metrics to determine if money transmitter license and cryptocurrency bond is needed. If a person is involved in any of the following activities, the likelihood is high that a license and bond will be needed:
Keep in mind that a license and crypto bond may also be needed for any adjacent states to where the business is operating. Licensing bonding may also be required in any state that the person or business advertises their services.
Generally speaking, if a person or business is an exchanger or administrator of Cryptocurrency on a Federal level, they will likely need to be licensed as a money transmitter and to obtain Crypto Bond. FinCen defines these roles as follows:
A person or business should always check with local and Federal laws to determine if they or their business fall into any of these categories.
To obtain a Crypto Bond, the company or individual will need to provide the following:
The most important factor for obtaining Crypto Bonds is the financial strength of the company being bonded. For money transmission, the bond company is guaranteeing that you are going to be able to pay customer obligations as they are due. Having a strong, liquid balance sheet is key to this process. Companies without strong liquidity will find it difficult to obtain Crypto Bonds.
Another important factor for writing Cryptocurrency Bonds is the makeup of the company or individual’s assets. Cryptocurrency and digital assets have been volatile. Market fluctuations are common. Surety bond companies want to make sure that those needing Crypto Bonds have the liquid assets to pay their obligations that are not tied to Cryptocurrency.
The crash of FTX only magnified these underwriter concerns. If a company’s assets are all tied up in digital currency, a downward trend could cause them to be unable to meet their financial obligations. For this reason, liquid assets or collateral are required to write Cryptocurrency Bonds in most cases.
Axcess Surety does work with some markets that will accept Bitcoin as collateral for writing crypto bonds. The market is limited, but accounts with strong crypto balances can be considered.
Many companies needing Crypto Bonds are domiciled outside of the United States. This can present challenges for those needing Crypto Bonds. Surety bond companies will want to make sure that the company is holding sufficient liquid assets in the U.S. to cover any obligations that may arise.
It can be expensive, time consuming and sometimes impossible to collect from businesses outside of the United States. Therefore, surety companies writing Crypto Bonds will want a U.S. presence with sufficient liquid assets. If this is not possible, collateral may be used to secure these bonds.
There are exceptions to this rule. Large and financially strong international companies can typically secure these bonds with ease. There are bond companies that specialize in this type of Reverse Flow surety bond and Axcess Surety can work to help these companies get their bonds placed.
Cryptocurrency is still fairly new to the surety industry. There are still a limited number of bond companies writing these types of bonds. This lack of competition decreases the capacity available for Crypto companies and can lead to bond companies being more selective or offering more strict terms than they would in a softer marketplace.
Cryptocurrency Bond costs are based on the financial strength of the crypto company. Because these bonds are still considered high risk, most Crypto Bonds will cost between 2% - 4% of the bond amount annually. Keep in mind that stronger companies can always qualify for better rates. Some surety bond companies may also offer significant discounts if the crypto company will purchase multiple years in advance.
The amount of a Cryptocurrency Bond depends on the state requiring the bond. These amounts range from $10,000 - $500,000. Keep in mind that many crypto companies will require bonds in multiple states and may need more than one bond.
Most states will cap the surety bond company’s liability as the bond amount regardless of the amount of claims or number of claims filed. In most cases, this means that the amount of the bond could be insufficient to cover all claims if the crypto company collapses. Payment against the bond will usually not relieve the company or individual against further liability.
Most Crypto Bonds are required to be continuous as long as the company or individual maintains a license in that state. Usually, these Cryptocurrency Bonds can be canceled by giving 30 or 60 day notice, depending on the state. However, the surety bond company and crypto company are usually still responsible for any claims that occurred while the bond was in place and during the cancellation period.
There are three parties to a Cryptocurrency Bond, the principal, obligee, and surety.
The principal pays the surety a bond premium and promises to indemnify the surety bond company for any losses that they incur. In return, the bond company provides the Cryptocurrency Bond to the state on behalf of the principal. The bond promises to pay claims to the public for the principal’s failure to pay amounts owed or comply with other obligations of their licensing. If a claim does occur, the surety will investigate and pay the claim. The surety will then seek to be reimbursed by the principal under the indemnity agreement.
Cryptocurrency is still a relatively new form of money. The laws surrounding licensing and bonding for crypto are also changing fast. Many states are beginning to require specific Cryptocurrency Bonds and Axcess Surety has the bond markets and expertise to help you obtain these. Contact us anytime for all your Crypto Surety Bond needs.
Axcess Surety is the premier provider of surety bonds nationally. We work individuals and businesses across the country to provide the best surety bond programs at the best price.
