Back in October, 32-year-old John Dennehy tried to log onto his online bank account and found himself locked out of the system. He'd been banking with UK bank Barclays for more than a year, and had never had a problem. But he would soon discover that he no longer had access to his account—and that bank staff were unable to help him resolve the issue.
"I spent the next few days phoning helplines and visiting every Barclays branch in Norwich," Dennehy explained. "Things weren't looking hopeful." Determined, he convinced staff at one branch to let him make a withdrawal, leaving just a few pounds in the account.
Later that week, Dennehy received a letter telling him his bank account would be closed and he needed to withdraw his funds before the account was shut down. Which would have been fine, if the letter had not been written, mailed out, and the closure made effective three days before it arrived through Dennehy's door.
For the few months prior to this ordeal, Dennehy had been buying and selling Bitcoin for profit through online exchanges, working freelance as a Bitcoin trader to supplement his income as a writer. His interest in both politics and technology made him passionate about cryptocurrencies, and their potential to change the way money works.
In its letter, Barclays quoted section 11 on page 33 of its Terms and Conditions by way of explanation—a vague section that talks about the circumstances in which the bank may terminate an account.
As it turns out, Dennehy's banking experience as a Bitcoin trader is not unique. After documenting the ordeal on his blog, four others got in touch to tell him that the same thing had recently happened to them. Standardised letter, unclear reasoning, little or no warning.
Numerous other cases are reported on the bitcointalk.org forum and non-expert speculation has flourished in response. User mintymark wrote that he had been banking with Lloyds since 1978 when he received a letter to say it'd be closing his account. User miztaziggy said he received a similar letter from Halifax (also owned by Lloyds Banking Group), offering an invitation to get in touch if he wanted to discuss things further. The informal letter was strangely worded, so he called the bank to verify its authenticity. It confirmed the account was under review and simply told him that he'd been found "no longer suitable" to bank with them.
In each of these cases, the customer identified the buying and selling of Bitcoin as the only change in how they were using their bank accounts. But why should this cause such a problem? After all, trading Bitcoin isn't illegal, and it's been openly endorsed by chancellor George Osborne as a way to aid Britain in becoming an innovative global leader. That said, the government has yet to issue definitive legislation on virtual currencies, which is likely a factor in the reluctance of banks to engage.
Reddit was buzzing with possible explanations for these bank account shutdowns. Users suggested suspected fraud, money laundering, or tax evasion as the most likely reasoning.
These claims highlight a key controversy of Bitcoin: its anonymous nature. A person can buy and spend the digital currency without sharing personal information, making it a tool with the potential for use in illicit transactions or illegal activities. But in this way, all it really does is pose the same problems online as cash transactions do offline.
Barclays later told Dennehy that his account had been frozen initially due to a suspicious reversed transaction, which suggests that some kind of anti-money laundering flag was raised. "The only explanation for that is that somebody who bought Bitcoin from me tried to reverse the transaction after receiving their currency," he said.
On the subject of taxation, an HMRC briefing from March 2014 states that Bitcoin will be treated in a similar way to traditional currencies. That's to say that traders are generally subject to the same income tax regulations as any other freelancers. In general, the newly self-employed are required to register for tax returns within three months of starting trade, and as a self-employed person, you are not obliged to open a business bank account.
In these cases, customers had been using personal accounts to buy and sell Bitcoin for several months, most having banked with the same company for a significant period of time beforehand.
Unless banks are defining Bitcoin transactions as potentially criminal by definition, the act of buying and selling Bitcoin should not be reason enough for closing an account. Essentially, all a Bitcoin trader is doing is receiving and withdrawing money from a bank account—which doesn't in itself violate any terms and conditions, and is surely the reason any of us actually use banks.
The lack of communication from the banks involved has left lots of room for confusion, and speculation. There are even rumours circulating online that institutions are tracking reference codes involved in Bitcoin-related transfers to identify those buying and selling the cryptocurrency.
I feel banks are using money laundering and crime simply as an excuse to not encourage the growth of Bitcoin
In generic statements, all four banks told me that account closures are always considered on an individual basis, that they are unable to discuss individual cases, and that they're actively exploring cryptocurrencies and the regulations relating to them.
HSBC went as far as to add that they were not prepared to "confirm whether an individual or business is or has been a customer"—a response to an email exchange that largely centred on the high profile and widely-reported HSBC account closures of Global Advisors last month. The Jersey-based company manages the first regulated Bitcoin fund, and was told by HSBC that its account was believed to be "at risk of potential money laundering."
Meanwhile, Barclays was keen to highlight that "we don't have a policy against [Bitcoin], or any other cryptocurrency. In fact, we recently hosted a conference in London looking at both cryptocurrencies and the block chain platforms used to run them."
Richard Howlett of Selachii LLP, a boutique law firm that advises on digital currency, believes that Bitcoin is still too much of an unknown at the moment. "I feel banks are using money laundering and crime simply as an excuse to not encourage the growth of Bitcoin," he said. "Banks are wary of money laundering issues, but [government-issued] fiat currency and, in fact, any type of payment system or currency is open to fraud and money laundering."
"Bitcoin circumvents the necessity for banks if widely adopted, and there seems to be a widespread agenda for all banks to not allow any Bitcoin customers or businesses," he added.
Howlett also highlighted the lack of regulatory guidance on Bitcoin as a key issue. "The UK government doesn't have a clear position on cryptocurrencies at present. They are deciding what action (if any) to take, but it appears to be well down on their priority list."
Until the UK adopts clear legislation, it seems that those buying and selling Bitcoin will continue to struggle with old-school institutions and their conservative approaches to cryptocurrencies.
Unfortunately, Bitcoin has to rely on these very institutions for legitimacy, integration and, ultimately, more widespread adoption. At least for now.