San Francisco Federal Reserve Director Warns Community Banks about Bitcoin Risks

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San Francisco Federal Reserve Director Warns Community Banks about Bitcoin Risks
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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.”

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Canadian Revenue Agency: Bitcoin Considered as Foreign Fund or Property for Taxes
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The Canadian Revenue Agency recently stated in section 233.3 of the Income Tax Act that bitcoin and other digital currencies are considered “specific foreign properties” and are to be treated as foreign funds or intangible properties.

The rules of the Income Tax Act document states that foreign properties including bitcoin that exceeds the value of $100,000 CDN should be reported with a tax form called T11135 to notify the amount of bitcoin held by an individual or an organization.

In the Canadian Revenue Agency Document No. 2014-0561061E5 “Specified Foreign Property,” the CRA states that digital currencies including bitcoin and other cryptocurrencies are considered as foreign funds if they are held or deposited outside of Canada and if they are not used in an active business.

Furthermore, the CRA explained in the document that a partnership which holds digital currencies are classified as a foreign property if “the total of all non-resident members’ shares of the income or loss of the partnership for the fiscal period is less than 90% of the total income or loss of the partnership for the period.”

Such partnership would be specified as a foreign property of the Canadian corporate owner and the digital currencies used in its operation will be also classified as foreign properties or funds of the partnership.

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BNP Paribas Testing Plans to Add Bitcoin to its Currency Funds
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France’s biggest bank BNP Paribas is reportedly testing the idea of adding bitcoin to one of its currency funds, a source at the bank told International Business Times UK. The unnamed source said that BNP Paribas has been doing “beta testing” involving cryptocurrency, and the official announcement could come in the near future. A spokeswoman for BNP Paribas told International Business Times UK: “We are looking at blockchain technology and how it can be applied to post trade processes to make things faster and potentially cheaper but it’s all very much projects and it’s all in testing. It’s nothing live.”

BNP Paribas, headquartered in Paris, was formed through the merger of Banque Nationale de Paris (BNP) and Paribas in 2000. It’s one of the largest banks in the world. Based on 2012 information BNP Paribas was ranked as the third-largest bank in the world, as measured by total assets, by Bloomberg and Forbes.

In November, writing on Quintessence, the financial magazine of BNP Paribas, financial securities research analyst Johann Palychata argued that bitcoin and other digital currencies could shake up traditional banking and financial services.

The analyst noted “the slow emergence of an ecosystem to accommodate a broader use of crypto-currencies in the real economy,” and the possibility that large corporations might decide to use the Bitcoin network rather than existing settlement systems.

PYMNTS noted that Palychata’s article, which publicly suggested that “the development of an alternative to the current banking system is under way,” was remarkable because it came from one of the world’s largest banks.

A few weeks ago, Palychata  wrote another Quintessence article on the possible impact and future implications of the blockchain for securities markets. “[The blockchain] is the first successful attempt for a secure and decentralized register,” said Palychata. “It should be considered as an invention like the steam or combustion engine.”

Palychata considers the possibility of a scenario, never mentioned or discussed by mainstream financial institutions, where the blockchain makes traditional operators in the securities market redundant and obsolete, replaced by smart markets where buyers and sellers transact directly without intermediaries and the blockchain itself keeps a public, permanent and tamper-proof record of transactions and security ownerships.

“Investment funds have a good chance of becoming one of the first real banking users of crypto-currencies, providing a standardized platform for international fund distribution,” said Palychata, adding that the blockchain technology behind Bitcoin could bypass the banks that currently act as intermediaries.

The analyst also imagined a scenario where the current leaders remain in charge, but are forced to adapt to the emerging blockchain-based financial technology – a scenario that is becoming closer with the recent blockchain initiatives of companies such as Nasdaq and Overstock. It’s evident that BNP Paribas – if the rumors are confirmed – intends to adapt.

In other news, Société Générale, another French multinational banking and financial services company headquartered in Paris, published a job offer calling for an IT developer to work on Bitcoin, blockchains and cryptocurrencies at its London premises. The bank is looking for candidates with previous IT experience in a banking environment or in a fintech startup.

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