Wallace Young, the director of the Federal Reserve Bank of San Francisco, has published an article suggesting community banks should be cautious about Bitcoin firms and consumers. He also pointed out the digital currency’s pros and cons.
“Caution is appropriate,” Young said. “Bankers should carefully weigh the pros and cons of extending any loan secured by bitcoins or other virtual currencies (in whole or in part), or where the source of loan repayment is in some way dependent on the virtual currency.”
Throughout the article, Young notes the potential risks of bitcoin, including credit, compliance, reputational and operational risks for businesses and consumers treating bitcoin as assets and as collateral.
Specifically, Young emphasizes the “need” to monitor and control virtual currencies due to its “less-than-transparent” nature and its risk in an event of a loan default. Young suggested community banks take control of bitcoin holders’ private keys and access to bitcoin wallets in a loan default, and noted that banks must require additional monitoring to check whether the customer’s activities are legal.
“The less-than-transparent nature of the transactions may make it more difficult for a financial institution to truly know and understand the activities of its customer and whether the customer’s activities are legal,” Young wrote. “Banks are expected to manage the risks associated with the accounts of virtual currency administrators and exchanges just as they would any other money transmitter.”