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

Many wanted to hear what Kahle, an early technology pioneer who made the Internet consumer-friendly, had to say. He created the web’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 in 1999. The MIT computer science graduate also opened the Internet Archive in 1996, which preserves everything posted on the web – a digital library accessible to all.

With so much success throughout his life, Kahle’s words may have surprised his audience when he described the death of a credit union 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 Internet Archive Credit Union,” he continued. “We write this hoping many of you will read it.”

Kahle (pictured at left) then listed a dozen bullet point complaints that he indicated led to the demise of the 395-member credit union.

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

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

The NCUA doesn’t comment on the “supervision or on particular credit unions,” John Fairbanks, a spokesperson for the federal agency, said.

However, he said the NCUA reduced regulations and shortened examinations for small, well-run credit unions and dedicated special resources to help new credit unions succeed.

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

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

Trouble began to brew between the NCUA and IAFCU during the summer of 2013, just six months after the cooperative opened its doors in the fall of 2012 to serve low-income and middle-class individuals.

The conflict was over whether the credit union could serve Bitcoin firms.

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

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

For example, WIRED magazine published a story in July 2013 headlined: “The Internet Archive Rescues Bitcoiners from Banking Oblivion.”

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

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

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

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

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

“They have been in our branch now around once a month for two years, driving up our costs and driving down our services,” he wrote.

In September 2013, CU Times reported IAFCU was ensnared in a contretemps with Bitcoin exchange Tradehill in late August, in which Tradehill said IAFCU would host its accounts. IAFCU countered on Aug. 29, posting on its website that it held no Bitcoin accounts whatsoever. Tradehill subsequently suspended trading and blamed it on IAFCU.

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

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

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

On a national level, virtual currencies were increasingly under scrutiny by the federal government amid concerns that digital money, which has anonymity built into it, could facilitate money laundering, fraud and terrorism.

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

But as a Money magazine article explained, that is not completely true. These companies partner with an intermediary, a digital currency processor, which takes a customer’s bitcoin payment, converts it to cash, and deposits the money into the company’s bank, according to Money.

Kahle is an avid Bitcoin supporter, writing in a February 2013 blog post that Bitcoin was “the mathematically very cool digital currency.” He even bragged about having a “cool vanity bitcoin address” 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 credit union’s growth was restricted because it could only make loans of up to $5,000. That allowed the credit union to offer payday-like loans and small car loans – loans that Kahle said the credit union was not excited to offer and were not lucrative enough to allow it to break even.

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

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

He expects the revenues generated from these unsecured loans will help build the credit union’s capital and the ability to offer more products and services eventually.

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

In his Nov. 24, blog post, Kahle acknowledged IAFCU made mistakes, but also had unusual advantages: An experienced banker CEO, almost unlimited capital and a market that wanted alternative banking options.

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

On Dec. 1, the IAFCU board of directors voted to voluntarily liquidate the credit union, and on Dec. 8, the voluntary liquidation was approved by members, Modell said.

IAFCU mailed its letter of voluntary liquidation to the NCUA last week.

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

Instant Insights /

Death of a Credit Union: Internet Archive FCU Voluntarily Liquidates

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