Yet another bitcoin exchange has had the plug pulled on its bank account. Unlike Bitfloor, which went off-line last week, however, Canadian exchange Virtex is still operational – and its founder told us how.

Two-year-old, Calgary-based Virtex was contacted by the Royal Bank of Canada on April 5 and told that its bank accounts would no longer be operating, according to Virtex's founder, Joseph David, Virtex’s founder. He said he wasn't told why. However, he thinks it was because Virtex did not yet have the right documentation.

"The problem that the banks have with us isn’t the bitcoin," David said. "It's the fact that when you’re accepting money, specifically cash deposits at the bank, you must have a license to operate as a Money Services Business."

These licenses are granted by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), and are required by any company conducting foreign-exchange dealing or money transfers.

Even though bitcoin is an unregulated system, fiat currencies are regulated. This means that if a company like Virtex wants to exchange bitcoins for another "regular" currency, it is regulated by the governing body that oversees dealers in that currency.

David says that MSB licenses are difficult to get. The company had applied for one when it opened its account with the RBC, he said, but it took over a year to acquire. It partnered with technology consulting firm TAYPE international, which was its first investor and is also a Canadian-registered MSB.

"The application for the license was taking so long, and we needed to operate in the meantime," David says. "Our mistake was not telling them (the bank) that we were applying ... We did not proactively go to them and say, 'We're pursuing a license, we'll have it to you shortly.' "

The company apparently didn't tell CIBC or TD either. In August 2012, both those banks shut down its accounts with Virtex. The company managed to stay in business because it had agreements with several banks. Even though others have pulled the plug, Bank of Montreal (BMO) and Scotia bank stand by it for the time being.

David said Virtex is taking care to keep its remaining banks happy, submitting all of its anti-money laundering and "know-your-client" (KYC) documents to those banks to avoid any further difficulties.

Many exchanges can take payment in different ways, including email transfers, direct debit and credit, wire transfers and bank drafts.

"Depending on the method, it has a corresponding regulation," said David, adding that he is fastidious about how Virtex takes payments. The firm will accept money in cash, in person.

"If you are just accepting cash, then you have just one set of rules (to abide by)," he said.

Although Scotiabank and BMO are the only banks supporting cash-in-person payments to Virtex right now, the exchange is able to take Canadian dollars, because the Canadian banking network includes online bill payment. The company is registered with all of the online banks as a payee, meaning that anyone can send Virtex money by treating the transaction as a bill payment in their online banking system.

Even that process is not easy, however.

"That requires extensive KYC documents, and our approval, our discretion," David said. "We basically have to approve you that you're not a criminal. That's the problem with this business. It attracts fraud. It's a tough business to be in."

David won't take email money transfers using Canada's popular Interac system, which he calls a "recipe for disaster" because it opens him up to fraud.

"We were victims of email money transfer fraud in the early days," he noted.

Virtex is now the only Canadian exchange to carry an MSB license, said David, and the stakes now are particularly high. The firm has processed $16 million (CAD) in volume over the past two years, but the bulk of that has come through in the last three months during bitcoin's massive rally. The exchange currently processes around 1,000 bitcoins each day,

RBC declined to comment on the issue yesterday.