It's hard to imagine the words "surety bonds" and "cryptocurrency" being uttered in the same sentence, but it's quickly becoming a reality for those involved in cryptocurrency trading. As cryptocurrencies evolve from fringe investments to mainstream instruments, surety bonds may become an increasingly common requirement for those looking to trade in virtual currencies.
The following takes an in-depth look at cryptocurrency surety bonds, including their overall purpose and how these bonds are likely to impact cryptocurrency trading.
How Do They Work?
Ordinary surety bonds act as a contract between three parties: the entity requesting the bond (the principal), the bond's beneficiary (the obligee) and the company issuing the bond. What a surety bond does is guarantee that the principal will fulfill their obligations, whether it's completing a long-term project or processing a financial transaction.
Cryptocurrency surety bonds work in the same basic manner, ensuring that the principal performs cryptocurrency transactions as expected. In this case, the contract is between the entity handling the virtual currency transaction, the regulatory entity requiring the surety bond and the surety bond provider.
Why Are They Necessary?
As cryptocurrencies like Bitcoin and Ethereum continue to flourish, federal and state regulators are coming to grips with their growing popularity in the financial sphere. Cryptocurrencies remain largely unregulated and there's been plenty of concern among financial experts of cryptocurrency enabling criminal activities like money laundering and tax evasion.
In an effort to protect consumers and encourage greater transparency when it comes to cryptocurrency transactions, some states are revising their laws to place virtual currency trading under the same regulatory umbrella as money transmitters.
For instance, the state of New Hampshire has recently amended its regulations requiring crypto currency exchanges to be regulated as money transmitters. As a result, virtual currency traders are now required to maintain a surety bond in the amount of $100,000.
Which States Require Cryptocurrency Surety Bonds?
New Hampshire isn't the only state that's requiring surety bonds for those who wish to sell bitcoins for cash. Other states have also implemented licensing and bonding requirements for money transmitters involved in cryptocurrency trading. These states include Connecticut, North Carolina, New York and Washington.
The bond amounts required for a cryptocurrency surety bond vary among each state. For example, North Carolina requires a bond amount ranging from $150,000 to $250,000. Washington's bond amounts for cryptocurrency surety bonds are significantly cheaper, ranging from $10,000 to $50,000. The idea of a $250,000 surety bond may seem eye-watering, but the actual cost of a surety bond may be as little as one percent, depending on creditworthiness and other financial factors.
Some states may have other requirements in addition to maintaining a crypto currency surety bond. For example, cryptocurrency traders must maintain a trust that's supervised by a qualified custodian. Some states are also requiring cryptocurrency exchanges to undergo regular third-party security auditing of their systems.
What Does This Mean For You?
If you have a few bitcoins you're planning to sell, there's little need to worry about a surety bond. Individual sellers are largely unaffected by these changes. Surety bond requirements for cryptocurrency traders mainly target businesses specializing in brokering virtual currencies. Cryptocurrency surety bonds are one way of ensuring a safe operating environment for those trading virtual currencies.
However, there have been some negative reactions towards these new regulations. The recent changes have led to some cryptocurrency exchanges to discontinue operations in affected states while others are adapting to the new regulatory environment.
Cryptocurrencies continue to make headlines as the wave of the financial future, providing an innovative way to facilitate financial transactions while offering a golden opportunity for investors. With cryptocurrencies becoming more popular among mainstream investors, surety bonds and other regulatory protections will likely become commonplace. Contact companies like Service Insurance Company for more information.