Brewster Kahle, a Dec. 2 speaker at the Future of Money andTechnology Summit in San Francisco, stood behind a lectern in acrowded room and made a dramatic announcement about the creditunion he founded.

Many wanted to hear what Kahle, an early technology pioneer whomade the Internet consumer-friendly, had to say. He created theweb’s first publishing system, called Wide Area Information Server,in 1989 and sold it to AOL. He also co-founded Alexa Internet,which helps catalog the web that was purchased by Amazon.com in1999. The MIT computer science graduate also opened the InternetArchive in 1996, which preserves everything posted on the web – adigital library accessible to all.

With so much success throughout his life, Kahle’s words may havesurprised his audience when he described the death of a creditunion he opened just three years ago, the $2.5 million Internet Archive Federal Credit Union in New Brunswick,N.J.

“Dear National Credit Union Administration,” he said. “You win,we lose.”

“This is our notice of Voluntary Liquidation of the InternetArchive Credit Union,” he continued. “We write this hoping many ofyou will read it.”

Kahle (pictured at left) then listed a dozen bullet pointcomplaints that he indicated led to the demise of the 395-membercredit union.

“You did not need to crush this credit union,” he said.

Those bullet point grievances included claims that the NCUArestricted the credit union’s loan portfolio to $37,000 when it had$1 million in reserve for bad loans; prevented IAFCU from making astudent loan, forcing the member from college; revoked themembership of migrant farm workers; disallowed loan participations;dispatched examiners and “special examiners” to IAFCU’s officeevery month for two years and treated the staff like children.

The NCUA doesn’t comment on the “supervision or on particularcredit unions,” John Fairbanks, a spokesperson for the federalagency, said.

However, he said the NCUA reduced regulations and shortenedexaminations for small, well-run credit unions and dedicatedspecial resources to help new credit unions succeed.

Fairbanks also noted while new credit unions face challengingeconomies of scale, the NCUA this year chartered two of what hecalled innovative credit unions – the $4.1 million Finest Federal Credit Union in New York City and the $613,913Seneca Nation Federal Credit Union in Irving, N.Y. – that aresuccessfully serving their members.

CU Times requested that IAFCU President/CEO JordanModell (pictured at left) provide its correspondence with the NCUAto substantiate the credit union’s claims. Modell declined becausehe said it would be illegal.

Trouble began to brew between the NCUA and IAFCU during thesummer of 2013, just six months after the cooperative opened itsdoors in the fall of 2012 to serve low-income and middle-classindividuals.

The conflict was over whether the credit union could serveBitcoin firms.

Modell, a 31-year veteran banker who held executive positionswith Citibank, American Express, Chase and the Bank of New York,said he received permission from the NCUA to serve the non-moneyservice business side of three Bitcoin firms.

Modell said he was not allowed to go into specifics about theBitcoin companies, but surmised the NCUA changed its mind about theBitcoin businesses after several articles in mainstream and tradepress were published.

For example, WIRED magazine published a story in July2013 headlined: “The Internet Archive Rescues Bitcoiners fromBanking Oblivion.”

“We asked the NCUA’s permission and received written permissionfrom the NCUA to take on Bitcoin firms,” he said. “We were veryselective about the people we took on and none of them to us seemedto be MSBs.”

Modell understood that as long as the credit union was notserving the money service business side of the Bitcoin firms, itwould be acceptable to regulators because IAFCU did not have a compliance system in place to serve moneyservice businesses.

“Once we did that, we basically we found ourselves on the wrongend of the stick with the regulators even though they’ve given uspermission,” he said. “Then they came in, and ever since then, theyjust focused on that.”

Modell also said the NCUA brought in what he called a “specialregulator” from Florida, who audited the Bitcoin transactions anddetermined the Bitcoin firms were money service businesses.

In a Nov. 24 blog post, Kahle complained the NCUA kept auditingand investigating the credit union at a level that often took morehours than it spends on all member services combined.

“They have been in our branch now around once a month for twoyears, driving up our costs and driving down our services,” hewrote.

In September 2013, CU Times reported IAFCUwas ensnared ina contretemps with Bitcoin exchange Tradehill in late August, inwhich Tradehill said IAFCU would host its accounts. IAFCU counteredon Aug. 29, posting on its website that it held no Bitcoin accountswhatsoever. Tradehill subsequently suspended trading and blamed iton IAFCU.

Perhaps what also concerned NCUA regulators was that the Bitcoinindustry was coming under a lot of scrutiny in 2013.

Dwolla, a Des Moines, Iowa-based payments processor,was subpoenaed bythe state of New York in August 2013 in an investigation involvingvirtual currencies such as Bitcoin.

In May, a $2.9 million Dwolla account held at the $2.7 billionVeridian Credit Union in Waterloo, Iowa was seized bythe Department of Homeland Security in a move against Bitcoinexchange Mt. Gox. That seizure became public in mid-August.Veridian said it did not engage in using or holding any form ofvirtual currency.

On a national level, virtual currencies were increasingly underscrutiny by the federal government amid concerns that digitalmoney, which has anonymity built into it, could facilitate moneylaundering, fraud and terrorism.

Nevertheless, supporters argue Bitcoin is being used currentlyto legitimately purchase goods and services. According to mediareports, more than 100,000 merchants accept bitcoin currency,including major brands such as Microsoft, Dell, PayPal, Expedia andReddit.

But as a Money magazine article explained, that is notcompletely true. These companies partner with an intermediary, adigital currency processor, which takes a customer’s bitcoinpayment, converts it to cash, and deposits the money into thecompany’s bank, according to Money.

Kahle is an avid Bitcoin supporter, writing in a February 2013blog post that Bitcoin was “the mathematically very cool digitalcurrency.” He even bragged about having a “cool vanity bitcoinaddress” in a November 2013 blog post and used bitcoins to pay his“interested employees” at his Internet Archive company.

Aside from the Bitcoin issue, Kahle complained that the creditunion’s growth was restricted because it could only make loans ofup to $5,000. That allowed the credit union to offer payday-likeloans and small car loans – loans that Kahle said the credit unionwas not excited to offer and were not lucrative enough to allow itto break even.

However, while other new credit unions with same restrictionunderstand the rationale behind the $5,000 loan limit, they areoptimistic that growth will eventually follow.

“We officially opened up our doors on May 13 of this year. Ourgrand opening was on the steps of city hall,” Keith Stone,president/CEO of the Finest FCU, said. “To date, since July, we'veclosed over about 500 unsecured loans in excess of $1.8 milliondollars. We're a $4.5 million credit union right now. Safety andsoundness, as you know, is paramount and the NCUA wants to makesure credit unions starting out don't go above and beyond safetyand soundness. If we went above the $5,000, even if we were allowedto, we would run out of money. Our ratios would be off, we justcouldn't do it.”

He expects the revenues generated from these unsecured loanswill help build the credit union’s capital and the ability to offermore products and services eventually.

“Certainly, going forward in the future we would expect as wegrow that the NCUA will start to amend our letter of understandingand agreement to help us continue to provide the services that weneed to for our members and provide help for them,” Stone said.

In his Nov. 24, blog post, Kahle acknowledged IAFCU mademistakes, but also had unusual advantages: An experienced bankerCEO, almost unlimited capital and a market that wanted alternativebanking options.

“I now believe it is not just us, because 200 to 300 creditunions are shut down every year, many of which by the NCUA, whichwas started in 1970,” Kahle wrote. “Only a few are allowed tostart. We have heard many tales from other credit unions and theassociations that try to help new ones that echo our experiences.We now know firsthand how they go after small and medium sizedcredit unions and force them to merge their assets into biggercredit unions. If you have an account in a credit union, especiallya small or medium sized one, I would worry that they will go afteryours.”

On Dec. 1, the IAFCU board of directors voted to voluntarilyliquidate the credit union, and on Dec. 8, the voluntaryliquidation was approved by members, Modell said.

IAFCU mailed its letter of voluntary liquidation to the NCUAlast week.

The NCUA did not respond to a CU Times inquiry as towhether the federal agency will accept the credit union’s voluntaryliquidation.