FROM BULBS TO BITCOINS: THE LEGALITY OF CORPORATE BANKING RESTRICTIONS ON CREDIT CARD CRYPTO-CURRENCY PURCHASES
By: Peter G. Economou, Vol. 102 Staff Member
The modern world is one of exponential technological innovation and growth. From drone delivery services and autonomous vehicles, to artificially intelligent personal assistants capable of becoming either your closest ally or immortal enemy (for those who oft find themselves dueling with their Siri or Alexa), there is no shortage of discourse surrounding the benefits and drawbacks of technological advancement. In the past three months, one technological advancement in particular has been the focal point of staggering amounts of attention and debate: Crypto-currencies. Crypto-currencies—such as Bitcoin, Litecoin, Ripple, and Ethereum—have exploded onto the modern financial investment scene with a force unparalleled since Holland’s “tulip bulb mania” in the 1630’s. But like any explosion, the effects can be devastating without proper restraints and control.
The 17th-century Dutch tulip-bulb-boom was characterized as the world’s “first major financial bubble” collapse. In 1636, the Dutch stock market was flooded with a sudden influx of tulip bulbs being traded as financial currency, resulting in many Dutch citizens selling-off property to get in on the surging price of the newfound commodity-turned-currency. However, in 1637 the tulip bulb bubble burst, leaving hundreds of thousands of tulip bulb owners “in financial ruin.” Much like the Dutch tulip bulb, crypto-currencies are considered a technological advancement due to the fact that they are one of few decentralized currencies issued by private entities, the transactions are controlled by complex computer algorithms rather than banks or intermediaries, and as a result, there is a complete lack of federal or international regulation on the crypto-currency market. The lack of financial regulation accompanied by the threat of financial instability associated with the potential bubble burst has prompted many financial experts, including Dennis Gartman, to dub the Bitcoin value surge as “utter and complete nonsense.” Many major credit card companies share the skeptical opinions surrounding the future value of crypto-currencies. In the past month, most of the major U.S. credit card issuers have enacted some variety of ban on the purchase of crypto-currency through the use of credit cards. So far, the anti-crypto credit companies include Bank of America, JPMorgan, Citigroup, Capital One, American Express, and Discover. The crypto-currency purchase ban has pitted consumer rights against the banks’ interest in defending against serious financial risk resulting from consumers using their credit as leverage to buy more crypto-currency than they can truly afford, putting the risk on the card-issuing banks.
The controversy surrounding the future of crypto-currencies begs the question: What is crypto-currency and why have credit card companies attempted to ban its purchase by their cardholders? Furthermore, what is the legal status of a corporate ban on credit card-based crypto-currency purchases? While the historical tulip bulb anecdote suggests that the future financial value and legal status of crypto-currencies remains uncertain, one thing is sure—credit card companies want nothing to do with facilitating crypto-currency purchases. In the end, it is in the best interest of consumers and credit card issuers alike to strike an appropriate balance between minimizing financial risk and criminal liability associated with laundering, while maximizing consumer credit freedom. From bulbs to Bitcoins, the legality of corporate credit card purchase restrictions lies in the Bank Secrecy Act of 1970.
I. A BRIEF OVERVIEW OF THE CRYPTO-CURRENCY CRAZE
The crypto-currency market originated with the advent of Bitcoin in 2009 by the pseudonymous Satoshi Nakamoto, whose true identity remains uncertain today. As the original crypto-currency, analyzing the history of Bitcoin serves as a reliable means of understanding the crypto-currency market more generally. With little known about the intangible currency, the first Bitcoin owners had no reason to believe that the futuristic investment would eventually hold serious financial value. This understandable ignorance prompted the first documented Bitcoin sale in 2010, in which 10,000 Bitcoins were traded for two pizzas. To the horror of the unsuspecting Bitcoin seller, those 10,000 Bitcoins would be worth over approximately $100 million at current rates. The Bitcoin saga continued with frequent ebbs and flows. In 2011 the first copycat crypto-currencies hit the market, in 2013 the Bitcoin price crashed from $1,000 to around $300, in 2014 the Mt. Gox Bitcoin exchange heist resulted in over 850,000 of Bitcoin—valued at over $4.4 billion today—mysteriously disappearing from the hands of rightful owners. In 2016 Ethereum executed the first crypto-currency Initial Coin Offering (ICO), prompting the Securities Exchange Commission (SEC) to issue warnings to investors that the ICOs may involve scams and Ponzi schemes.
Bitcoin’s price peaked in December 2017, when the price of one Bitcoin surged to an astounding $19,000, a massive jump from a peak value of around $800 just one year prior. However, much like the proverbial lead balloon that was the Dutch tulip bulb, the Bitcoin rise was immediately met by a dramatic crash when the price bottomed-out around $7,000 in February 2018, less than half of its peak value.  It was in direct response to these unpredictable and devastating fluctuations that most major banks announced bans on crypto-currency purchases facilitated by credit cards. The banks relied on the unstable nature of the crypto-currency market as their main motivation for halting credit card purchases. Citigroup spokeswoman, Jennifer Bombardier, explained: “We will continue to review our policy as this market evolves[.]” Other credit card companies have taken a more outspoken and pessimistic stance on the future of credit card based crypto-currency purchases. Discover CEO, David Nelms, was not shy with his opinions on the crypto-currency boom, proclaiming that “[crypto-currency users are] crooks that are trying to get money out of China or wherever.”
The swift credit card ban initiated by Citibank, JPMorgan, Bank of America, and other major private banking entities cowers in the shadow of international governmental restrictions on the crypto-currency market. China blocked all foreign and domestic crypto-currency trading websites and ICOs in an attempt to protect itself from financial risks, and India’s finance minister, Arun Jaitley, announced that the Indian government “does not consider cryptocurrencies legal tender or coin and will take all measures to eliminate use of these crypto assets in financing illegitimate activities or as part of the payment system.” While corporate and governmental entities broadcast opinions on their respective reasons for fighting against crypto-currency markets, it still does not fully expound the true reasons for private banks to almost unanimously combat a technological advancement with the potential for real financial value and use. Moreover, consumers are left to speculate on the reasons why their banks will not support the purchase of legal currencies. To understand the corporate rationales behind the credit card crypto-currency purchase ban, it is necessary to analyze currently enforced, and seemingly identical credit card purchase restrictions—“vice” bans.
II. OTHER CREDIT CARD PURCHASE BANS: “VICE” PRODUCTS AND SERVICES
The crypto-currency credit card ban is not the first of its kind in the banking world. Most of the worlds’ major banks currently enforce multiple purchase restrictions on stereotypical “vice” products and services. The “vice” bans restrict consumer credit card purchases of products that either lie in a legal grey area, or products that are commonly deemed “vice” products and associated with moral criticism. For instance, American Express and most other major banks generally prohibit the credit card purchase of online and brick-and-mortar gambling funds and chips, contributions to controversial non-profit organizations, and online pornography. Credit executives have facially valid policy support for “vice” credit purchase restrictions, citing the need for banks to “combat illegal or brand damaging behavior.” Furthermore, as American Express spokeswoman Christine Elliot explains, an outright ban on pornography transactions acts as “an additional safeguard” on preventing the facilitation of child pornography purchases. After all—to the displeasure of criminal enterprises, gambling addicts, and pedophiles—banks are not in the business of funding illegal activities through a line of credit.
Interestingly, most banks also enforce a “vice” ban on a commodity that is quickly gaining legal status—marijuana. Currently, twenty-nine states have legalized some form of medicinal or recreational marijuana, yet most major banks ban credit card purchases even in states where both recreational and medicinal marijuana has been legalized. While banks seem to be imposing some level of moral scrutiny on the products customers choose to purchase, leaving consumers and physicians alike befuddled, the ban on credit card purchases of marijuana offers invaluable insight and clarity regarding the legal foundation upon which the crypto-currency ban stands.
III. THE LEGAL STATUS OF CREDIT CARD PURCHASE BANS: THE BANK SECRECY ACT OF 1970
Banks enforce “vice” bans, including restrictions on legal marijuana purchases, through the legal authority of the Bank Secrecy Act of 1970 (BSA). The BSA is a federal banking statute that applies to any bank or financial entity operating in the United States, regardless of whether it was organized under state or federal law. The BSA’s broad scope of authority allows it to operate as a vital legal recruiting tool, forcing private banks to assist the federal government in its money laundering prevention efforts. The BSA actively promotes the prevention of money laundering by creating a cooperative relationship between the federal government and all private banking entities. The BSA requires all banks operating in the United States to file reports of any transactions exceeding $10,000, while simultaneously reporting suspicious financial activity that might indicate “money laundering, and criminal activities like transactions associated with illegal drug activity.” Furthermore, the BSA requires banks to establish customer identification procedures that allow banks to identify a given customer’s standard account activity, and to have the ability to discover suspicious activity possibly related to criminal money laundering. At a minimum, the BSA requires all banks and financial entities to establish anti-money laundering programs that include “internal policies, procedures, and controls; the designation of a compliance officer; an ongoing employee training program; and an independent audit function to test programs.” The BSA functions as a legitimate legal means for justifying corporate bans on credit card purchases of legal marijuana, as banks would be forced to report essentially all marijuana-related transactions due to the fact they could violate federal drug control laws. Ultimately, the banks are using credit card purchase bans on grey-area products—like marijuana and porn—to insulate themselves from criminal and financial liability associated with criminal money laundering under the BSA.
The BSA includes serious financial and, in some cases, criminal penalties, for failures to abide by its anti-money laundering provisions. If a bank provides financial services to support criminal activities, like the purchase of drugs or weapons, the bank and its employees are “sentenced to a fine of not more than $500,000 or twice the value of the property involved in the transaction, whichever is greater, or imprisonment for not more than twenty years, or both.” Accordingly, if a bank facilitates transactions exceeding $10,000, and those transactions are associated with criminal activity, the bank is committing a federal crime and makes itself and its employees vulnerable to substantial fines or imprisonment.
An analysis of the BSA reveals that banks have every right to ban the credit card purchase of both legal and illegal marijuana, due to the fact that the drug remains illegal on a federal level. But this explanation does not quite account for the recent banking ban on crypto-currency purchases. Unlike marijuana, crypto-currency is not illegal on a federal level. Crypto-currencies are intangible, digital currencies that pose no immediate physical threat to its users, right? Not so fast. A closer look at the common uses for crypto-currencies reveals that the technological marvel may have a dark side that directly links it to illegal activities.
From its inception, crypto-currency owners have taken advantage of its unique and groundbreaking features—crypto-currency transactions are “anonymous, secure, and irreversible, and you [can] trade it from anywhere in the world with an Internet connection.” Untraceable, risk free transactions. What better investor base for crypto-currencies than criminals, and what better use than to discreetly purchase illegal products through the dark web. This is no fiery overstatement. A recent study done by professors from the University of Technology Sydney discovered that nearly half of all Bitcoin transactions between 2009 and 2017 were for illegal trade, including drugs, weapons, pirated goods, and many other illegal goods and services.
The crypto-currency market is still in its infancy, but banks have nonetheless taken a strong stance against the facilitation of crypto-currency purchases through the use of their credit cards. Much like the Dutch tulip bulb crisis of the 1630s, crypto-currencies have used their unique technological advances to set them apart from traditional forms of currency. But with the positives of crypto-currency development, there are a host of potential negative externalities. On the surface, it may appear that major banking corporations issued an outright ban on credit card crypto-currency purchases due to the obvious financial volatility of the crypto-market—a tulip bulb bubble through and through. But an analysis of the current “vice” credit card purchase restrictions reveals that major banks hold valid concerns that tie to the anti-money laundering provisions of the BSA. While the banks may use simple public statements citing concerns for financial instability, the roots of the crypto-currency credit card ban reach the real possibility of widespread criminal implications associated with credit financing of illegal activities. Furthermore, major banks have a legal duty under the BSA to internally monitor against the financing of criminal activities, and if banks authorized the purchase of decentralized, untraceable crypto-currencies, they would not be able to monitor suspicious customer transactions to the standards of the BSA.
It is correct to argue that crypto-currencies themselves are not illegal. However, since it is widely known by both the general public and banking executives that crypto-currencies are commonly used in illegal transactions, banks must take it upon themselves to draw a line in the sand using the authority of the BSA to shield themselves from liability. Where does this leave the consumers hoping to use their credit cards for crypto-currency purchases? Unfortunately, for the time being, it appears they are out of luck until the crypto-currency market can prove to major financial institutions that it no longer holds ties to illegal, untraceable transactions. From the Dutch tulip bulb to the Bitcoin, consumers are allocated the risk of financial loss via the transcending force of federal law.
- See generally Rory Carroll, Goodbye privacy, Hello ‘Alexa’: Amazon Echo, the Home Robot Who Hears it All, The Guardian (Nov. 1, 2015, 7:07 AM), https://www.theguardian.com/technology/2015/nov/21/amazon-echo-alexa-home-robot-privacy-cloud (using a first-hand account of an Alexa users’ experiences with the device to argue that the Alexa, as well as other artificial intelligence products, impedes upon personal privacy even without the users’ knowledge). ↑
- See id. (discussing that while the Alexa is good for advising on household tasks, like cooking measurements, the artificial intelligence-based device had serious downfalls, specifically when Alexa listened in on private conversations, even responding to aggressive statements like “fuck off” with “[t]hat’s not very nice to say”). ↑
- See Michelle Fox, Bitcoin Has Gone Beyond the Absurdity of the 17th-Century Tulip Bulb Mania: Dennis Gartman, CNBC: U.S. Markets (Dec. 7, 2017, 6:32 PM), https://www.cnbc.com/2017/12/07/bitcoin-has-gone-beyond-the-absurdity-of-tulip-bulb-mania-dennis-gartman.html (offering an expert analysis of the similarities between the Bitcoin explosion of 2017 to the 17th-century tulip bulb boom in Dutch stock exchanges). ↑
- Id. ↑
- Id. ↑
- Id. ↑
- See generally Martin Tillier, What is a Cryptocurrency?, Nasdaq (Jan. 25, 2018, 10:58 AM), https://www.nasdaq.com/article/what-is-a-cryptocurrency-cm910816 (outlining the ways in which crypto-currency differs fro traditional currencies). ↑
- See Fox, supra note 3. ↑
- David Z. Morris, Major Banks Ban Buying Bitcoin with Your Credit Card, Fortune: The Ledger (Feb. 4, 2018), http://fortune.com/2018/02/04/banks-ban-buying-bitcoin-credit-card/. ↑
- See id. (describing the recent windfall of credit card companies hoping to protect themselves from the risks associated with crypto-currency purchases). ↑
- See id. (“The moves are above all in the banks’ self-interest. As Fortune previously reported, the mania surrounding cryptocurrency late last year appears to have motivated many retail investors to use credit cards as leveraging tools, buying more cryptocurrency than they could afford.”). ↑
- See generally Bernard Marr, A Short History of Bitcoin and Crypto Currency Everyone Should Read, Forbes: Tech (Dec. 6, 2017), https://www.forbes.com/sites/bernardmarr/2017/12/06/a-short-history-of-bitcoin-and-crypto-currency-everyone-should-read/3/#1652f04861c7 (discussing how the first Bitcoin transactions in 2009 were “recorded and verified” using blockchain technology). ↑
- Id. ↑
- Id. ↑
- Id. ↑
- Id. ↑
- Id. ↑
- Id. (China responded to the first ICO even more harshly than the SEC, issuing an outright ban on all ICOs). ↑
- See Will Martin, Bitcoin Approaches $7,000 After 10% Fall in a Single Day, Bus. Insider (Feb. 5, 2018, 10:33 AM), http://www.businessinsider.com/bitcoin-ethereum-ripple-prices-on-february-5-bitcoin-below-8000-2018-2 (discussing the dramatic rise and fall of the Bitcoin price from December 2017, through February 2018). ↑
- See Oscar Williams-Grut, The Price of Bitcoin is at a 2016 High, Bus.Insider (Dec. 21, 2016, 7:20 AM), http://www.businessinsider.com/bitcoin-price-hits-2016-high-on-december-21-2016-12 (arguing that the unpredictable peaks in Bitcoin value operate “as a sign of fears about global growth in 2017”). ↑
- See Martin, supra note 19 (in late January and early February 2018, Bitcoin prices were dropping more than 10% per day, indicating its true volatility). ↑
- Id. ↑
- Laura J. Keller & Jennifer Surane, Bitcoin Ban Expands Across Credit Cards as Big U.S. Banks Recoil, Bloomberg Tech. (Feb. 2, 2018, 1:32 PM), https://www.bloomberg.com/news/articles/2018-02-02/bofa-to-decline-all-cryptocurrency-transactions-on-credit-cards. ↑
- Id. ↑
- See generally Xie Yu, China to Stamp Out Cryptocurrency Trading Completely with Ban on Foreign Platforms, S. China Morning Post (Feb. 5, 2018, 11:53 AM), http://www.scmp.com/business/banking-finance/article/2132009/china-stamp-out-cryptocurrency-trading-completely-ban (offering an in-depth analysis of China’s announcement to halt crypto-currency markets in hopes of avoiding financial security risks). ↑
- Martin, supra note 19. ↑
- See Quentin Fottrell, What Your Credit Card Won’t Let You Buy, MarketWatch (May 30, 2011, 8:47 PM), https://www.marketwatch.com/story/what-your-credit-card-wont-let-you-buy-1306530948401 (explaining how companies hope to “protect themselves against legal risk” by restricting credit card purchases of products and services that may be illegal depending on the specific state or federal jurisdiction.) ↑
- Id. ↑
- Id. ↑
- Id. ↑
- See State Marijuana Laws in 2017 Map, http://www.governing.com/gov-data/state-marijuana-laws-map-medical-recreational.html (last visited Feb. 20, 2018). ↑
- Fottrell, supra note 27. ↑
- See id. (arguing that the corporate bans act as severe inconveniences to merchants and consumers alike, and that “credit card companies are imposing their moral values on the world”). ↑
- See id. (citing criticisms from medical professionals on the ban of legal medicinal marijuana). ↑
- See generally Moises Gali-Velasquez, Changes Needed to Protect Banking and Financial Services When Dealing with the Marijuana Industry, Lexis Practice Advisor J. (Aug. 3, 2016), https://www.lexisnexis.com/lexis-practice-advisor/the-journal/b/lpa/archive/2016/08/03/changes-needed-to-protect-banking-and-financial-services-when-dealing-with-the-marijuana-industry.aspx (explaining how the BSA and its associated anti-laundering requirements impose a duty upon banks and credit card issuing entities to restrict marijuana-related transactions due to its federally illegal status under the Controlled Substances Act). ↑
- Currency and Foreign Transactions Reporting Act (popularly known as the Bank Secrecy Act), Pub. L. No. 91-508, 84 Stat. 1114 (1970), codified as amended in 12 U.S.C. §§ 1829(b), 1951–1959; 31 U.S.C. §§ 5311–5330. ↑
- See Gali-Velasquez, supra note 35 (“The BSA recruits banks in the fight against money laundering by requiring banks to assist the United States federal government in its enforcement efforts.”). ↑
- Id.; see also 31 U.S.C. §§ 5311–5312. ↑
- Federal Financial Institutions Examination Council, Bank Secrecy Act/Anti-Money Laundering Examination Manual 56–58 (2014), https://www.ffiec.gov/bsa_aml_infobase/documents/BSA_AML_Man_2014_v2.pdf. ↑
- Gali-Velasquez, supra note 35; see also 31 U.S.C. § 5318(h)(1). ↑
- Laundering of Monetary Instruments, 18 U.S.C. § 1956 (a)(1) (2016). ↑
- Gali-Velasquez, supra note 35. ↑
- Zachary Zane, Bitcoin and Cryptocurrency: What You Need to Know, Rolling Stone (Dec. 22, 2017), https://www.rollingstone.com/culture/features/bitcoin-and-cryptocurrency-what-you-need-to-know-w514552. ↑
- See Chris Pash, Australian Researchers Say Nearly Half of all Bitcoin Transactions are for Illegal Activity, Bus. Insider (Dec. 20, 2017, 4:30 PM), https://www.businessinsider.com.au/australian-researchers-used-the-dark-web-to-track-the-illegal-use-of-bitcoins-2017-12 (offering a preview of a soon-to-be published study that used groundbreaking technology to trace the supposedly untraceable Bitcoin transactions).