Cryptocurrency and Surety Bonds, an Interview with Brian Nelson, VP of Surety at Alpha Surety

November 7, 2023
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BitAML founder Joe Ciccolo sat down with Brian Nelson—a sage in the realm of surety bonds to demystify this pivotal element of financial regulation and compliance in the crypto space. 


In an increasingly complex financial world where cryptocurrency and blockchain technology continue to disrupt traditional monetary systems, the intricacies of surety bonds and their crucial role in the crypto space often remain cloaked in mystery. To demystify this pivotal element of financial regulation and compliance, we sat down for an in-depth interview with Brian Nelson, a Surety Bond Expert and Fintech startup advisor.

Before we dive in, some background on our guest. Brian Nelson plunged into the depths of bitcoin in 2011, initially as an enthusiast, but in 2013 he became a surety bond broker with a focus on Money Transmitter license bonds. It was during this period that he curated the inaugural surety program for bitcoin exchanges, underwriting bonds for many of the nascent crypto trading platforms. His path took a turn into entrepreneurship when he left Alpha Surety in 2016 to co-found a bitcoin startup, embracing the roles of advisor and consultant over the subsequent seven years. His journey has taken him full circle, as he rejoined Alpha Surety in January 2022, bringing with him an extensive network and a wealth of knowledge exponentially greater than before.

Nelson is not just a specialist in surety; he’s a bona fide “crypto guy,” whose expertise in state money transmitter licensing is now augmented by his comprehensive experience in the crypto domain. His current ventures include advising the Utah Blockchain Coalition, the organization spearheading crypto-friendly legislation in Utah, and his recent appointment as the Crypto Connect city leader for Salt Lake City, linking the local and international crypto communities. Further expanding his advisory repertoire, he’s involved with the FinTech startup Soon, a Y Combinator company.

In their conversation, Ciccolo and Nelson delve into the function of surety bonds within the regulatory framework of cryptocurrencies and how they serve as a linchpin in the trust between exchanges, regulators, and the investing public. With Joe’s probing questions and Brian’s seasoned insights, this discussion is poised to enlighten even those already well-versed in the field of cryptocurrency.


Joe Ciccolo, Founder of BitAML: Brian, given our history in the crypto space, I thought it’d be fascinating to delve into the intersection of our work, specifically around the state licensing process for cryptocurrency companies and the role of surety bonds. Can you clarify which states don’t require a surety bond?

Brian Nelson: Certainly, Joe. While it used to be a couple of states, it’s down to just Montana now. They have only recently implemented a license, so they’re catching up. 

Joe: That makes sense. It’s incredible how the requirement for surety bonds has become nearly universal in this field. Could you give our readers a primer on what a surety bond is and its importance in the licensing process?

Brian: Of course. A surety bond is essentially a three-party agreement that guarantees one party, usually the business, will adhere to the terms of the contract or regulations, for the benefit of another party, often the consumer. It’s not insurance. Instead, if there’s a claim against the bond, the surety company will pay out, but then seek reimbursement from the business. This is why it’s underwritten more like a line of credit.

Joe: That distinction is crucial. A surety bond’s purpose is really about compliance and protection, correct?

Brian: Precisely. It’s about guaranteeing that the client will follow the state statutes. If a business fails to deliver funds as promised, the bond is there to ensure the consumer doesn’t suffer as a result.

Joe: It sounds like a fundamental tool for consumer protection, particularly in the past when money transmission was more cash-based and vulnerable to fraud.

Brian: Absolutely. The bond acts as a safeguard, guaranteeing that funds arrive at the destination indicated by a customer or failure of the business to comply with state regulations.

Joe: How has the underwriting of these bonds changed with the growing regulatory expectations?

Brian: It’s become more stringent. What was once a somewhat casual process has evolved, reflecting the increased stakes and the seriousness with which these matters are now approached. This is also why businesses in our sector need to be increasingly diligent about their compliance measures.

Joe: A far cry from the early days. This evolution no doubt impacts the way companies like ours approach state licensing and compliance.

Brian: It does. The landscape has changed dramatically, and the sophistication of both regulatory frameworks and compliance strategies has grown in tandem.

Surety Bonds

Surety Bonds for Money Transmitters

Joe: Brian, you’re not an attorney, but you’re certainly knowledgeable about the intricacies of surety bonds. Can you enlighten us on the main ways a loss can occur on a bond?

Brian: Certainly. There are primarily two scenarios. The first is consumer loss, which is why states instituted surety bonds. If a customer’s money doesn’t arrive as intended, they can claim on the bond. The other situation involves fines and fees from state regulators. If a business fails to meet regulatory requirements, such as filing reports, the state can claim on the bond to cover the fines. In these scenarios, a claim on the bond is only made if the business is not able to financially cover losses.

Joe: It seems like surety bonds serve as a form of consumer protection. But what happens when there’s a claim?

Brian:  There’s a common misconception that claiming on a bond is straightforward, but there’s actually a detailed legal process. The surety carrier doesn’t just hand over money; they may even contest the claim to protect their interests, which indirectly protects the bonded company as well.

Joe: What’s the alternative to a surety bond?

Brian:  Some companies consider posting collateral directly with the state. However, it’s often not advisable because states can hold onto that collateral for up to five years after a business ceases operations in that state, due to the potential for delayed claims. And not all states offer the option of posting collateral directly.

Joe: You also mentioned record-keeping requirements. Can you expand on that?

Brian:  Under anti-money laundering regulations, a business is required to keep customer transaction records for at least five years. This obligation doesn’t end with the business; it continues for five years thereafter, which can pose a challenge for businesses that have shut down.

“What was once a somewhat casual process has evolved, reflecting the increased stakes and the seriousness with which these matters are now approached”. — Brian Nelson


Joe: Can you give us some insights into the loss ratio for money transmitter surety bonds?

Brian: Historically, the loss ratio for money transmitter bonds is incredibly low, well under 1%. This means that losses are quite rare, which is a testament to the system’s effectiveness.

Joe: How does the requirement for a surety bond fit into the regulatory landscape for money transmitters?

Brian: The bond is essentially a regulatory step that businesses must take before they can even apply for a license. It demonstrates to regulators that a company is backed by an insurer and meets certain standards, which helps weed out unqualified or dubious players.

Joe: With regards to pricing, how is the cost of a surety bond determined?

Brian: Pricing is based on underwriting, which considers several factors, including the company’s risk profile and the overall industry risk. For example, a $50,000 bond in Utah might cost around 2% annually, which is a general number based on underwriting.

Joe: Has the industry’s understanding of fintech companies and their associated risks evolved over time?

Brian: Absolutely. The industry has come a long way since companies like PayPal first struggled to get bonded. With better understanding and normalization, rates have become more competitive, and the process of approval has become more streamlined.

Joe: Lastly, could you share a bit about how the industry has changed post-2013 for money transmitters, especially with the emergence of Bitcoin exchanges?

Brian: Before 2013, the understanding was more traditional. However, as the fintech landscape has expanded, underwriters have had to adapt to new business models. For pioneers like Coinbase and Circle, securing bonds in the early days involved navigating through a lot of uncertainties. Today, the process, while still complex, is better understood.


Navigating the Stormy Seas of Crypto Insurance

Joe: In the tumultuous world of crypto, securing surety bonds is a necessity for survival. We’re sitting down with Brian, a broker with a unique perspective on this high-stakes industry, to discuss the recent upheaval in the crypto insurance market.

Brian, could you describe the impact of Philadelphia Insurance’s exit from the crypto bond market?

Brian: It was seismic. Philadelphia Insurance was underwriting the majority of bonds for crypto companies. When they pulled out, businesses were scrambling to secure bonds elsewhere — a non-negotiable for maintaining their licenses and, by extension, their operations. Costs doubled overnight, some companies faced new collateral requirements, and the availability of markets willing to support this business type dwindled.

Joe: How has the landscape changed post-FTX and other high-profile crypto failures?

Brian: The insurance costs have risen. For new companies asking about rates, I typically quote 2% prior to any underwriting, but also let them know that the current rate is somewhere between 1.5% to 3% based on the underwriting of each company. These hikes aren’t isolated to new players; even well-established firms aren’t immune. Market hesitancy isn’t just about the individual company’s health but about the industry’s risk profile, which has been marred by entities like Voyager and Celsius.

Joe: Can you explain your role in this process?

Brian: My role is dual-faceted: I represent my clients while protecting the carrier’s interests. I stress the importance of individual underwriting. Not all crypto companies should be tarred with the same brush due to a few bad actors. It’s about demonstrating to underwriters that many businesses maintain solid fundamentals despite the industry’s volatility.

Joe: You mentioned you’ve been successful in bringing new carriers into the crypto space. Can you tell us more about that?

Brian: Post-FTX, I saw an opportunity to educate carriers who were previously hesitant. I spent considerable time breaking down the complexities of the industry — from various business models to regulatory nuances. The result? Two carriers who’d never touched crypto before were now willing to write surety bonds on my recommendation.

Joe: Brian, what are the key factors that a crypto company must consider when seeking a surety bond?

Brian: There are three critical factors: rate, capacity, and indemnity. Rate is the premium they’ll pay; it’s important but so is capacity — the total amount of bonding they can secure, which has become more challenging post-FTX. Indemnity, the agreement about who’s accountable if a claim is made, can vary. For instance, a startup may require personal indemnity from its owners, while a subsidiary might need backing from its parent company.

“Entrepreneurs need to have their financials in order, as bonds are underwritten based on the principal’s creditworthiness and financial strength”. — Brian Nelson


Joe: And what about companies with foreign parent companies?

Brian: That adds another layer of complexity. We often have to find carriers willing to accept foreign indemnity, which can limit capacity or necessitate a split between various carriers to cover the needed amount.

Joe: With your in-depth experience, what should crypto entrepreneurs prepare before approaching you for a surety bond?

Brian: Entrepreneurs should have their financials in order, understand the regulatory requirements for each jurisdiction they’re entering, and be prepared to present a comprehensive picture of their business model. Solid preparation can streamline the process considerably. 

Joe: Brian, when it comes to meeting state license requirements, I’ve noticed that the financial aspect can be quite daunting for new entrepreneurs. They often get stuck on the surety bond part. What’s your take on that?

Brian: You’re right. The key is understanding that while surety bonds are a common requirement, they are fundamentally a promise by a guarantor. Entrepreneurs need to have their financials in order, as bonds are underwritten based on the principal’s creditworthiness and financial strength.

Joe: Absolutely. And from what I’ve seen, you don’t always need audited financials to get the ball rolling, which can save some upfront costs. What’s your advice on the financial statements that startups should prepare?

Brian: Well, audited financials are the gold standard, of course, but many startups can begin with a comprehensive internal balance sheet. It should represent the current financial condition and can sometimes be supplemented with a simple bank statement.

Joe: That makes sense. Do you think there’s a benefit to going the extra mile for audited financials even if they’re not strictly necessary for the surety bond?

Brian: Definitely, Joe. If the entrepreneur can afford it, audited financials are a valuable asset. They lend credibility and can often facilitate higher bond amounts or better rates. Plus, they’re reusable for multiple applications across different states.

Joe: Right, and that’s a long-term investment in their business’ financial credibility. It seems like a worthwhile expense considering the potential doors it could open for additional licenses and bonds.

Brian: Exactly. I’d say it’s all about planning for the future. Entrepreneurs need to weigh the initial costs against the potential benefits of easier access to surety bonds and smoother licensing processes down the line.

Joe: I think this will really help clear up some of the confusion around the financial requirements for state licensing and the role of surety bonds.  Thank you for your time and sharing your expertise today, Brian. It’s clear that navigating the surety bond market in crypto requires expertise and foresight.

Brian: Absolutely. It’s a challenging environment, but with the right strategy and understanding, companies can still find the support they need to thrive.

End of interview. *This interview has been edited and condensed.

Connect with Brian Nelson on LinkedIn

In Conclusion 

As our insightful dialogue with Brian comes to a close, we step back into the broader context of the crypto financial landscape. Throughout this exchange, we’ve uncovered the nuanced roles that surety bonds play in maintaining a stable and trustworthy crypto market. Joe Ciccolo’s pointed questions peeled back the layers of a topic that, while critical, is often overlooked or misunderstood by many in the industry.

The discussion with Nelson not only highlighted the increasing importance of surety bonds as the crypto space matures but also emphasized the necessity for expert guidance in navigating the intricate compliance environment. His unique blend of expertise in both surety bonds and the crypto world offers a bridge between the evolving digital frontier and the bedrock of financial security.

As the crypto market continues to evolve with new regulations and a growing need for transparency and trust, the role of experts like those at BitAML becomes ever more critical. For businesses venturing into or operating within the crypto space, understanding the complexities of surety bonds and staying compliant with regulatory demands is not just a legal obligation—it’s a strategic advantage.

Whether you’re an established crypto exchange, a startup navigating the initial hurdles of compliance, or an innovator exploring the intersection of blockchain technology and finance, BitAML is equipped to guide you through the complexities of surety bonds and regulatory compliance. BitAML is an indispensable ally in your journey through the crypto compliance landscape.

For those looking to bolster their understanding of surety bonds, seeking advice on state money transmitter licensing, or aiming to ensure their business aligns with current regulations, BitAML offers a beacon of expertise. Don’t let compliance be an afterthought in your crypto venture—make it the foundation upon which you build enduring trust and success. Reach out to BitAML for a consultation, and take the first step towards securing your place within the safe and compliant future of cryptocurrency.

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