You may have noticed cryptocurrency ATMs popping up in convenience stores and other brick and mortar locations across the country. As you may know, cryptocurrency is a form of digital tender that you can use to make purchases or sell for traditional currency like the U.S. dollar. Importantly, rather than being issued by a central bank, like the Federal Reserve, cryptocurrency is generated by a decentralized network of users over the internet. Bitcoin is the most well-known and widely used cryptocurrency, but there are many others, such as Dash, Ripple and Monero to name a few. While fairly new, you are now able to purchase products and services on a limited basis with cryptocurrency, which should widen if and when cryptocurrencies become more popular. There is now an increasing number of ATMs that allow the user to buy cryptocurrency with traditional cash, trade cryptocurrency for cash, or both.
Since cryptocurrency is a digital asset, these ATMs do not trade in physical cryptocurrency assets such as an actual physical “coin.” Rather, you must have a digital currency wallet. While physical cryptocurrency “wallets,” which resemble flash drives, exist, most users prefer to download apps, such as Coinbase, to their smart phones. When you use a cryptocurrency ATM, the digital wallet has a QR code, similar to a barcode, that is scanned by the ATM. From there, you can conduct your cryptocurrency transaction – whether getting cash for your cryptocurrency, buying cryptocurrency for cash, or both. With cryptocurrency ATMs rising in prevalence, ownership and operation of these machines raises potential legal issues for business owners and patrons.
One such issue is what business model to use if a business person wants to enter the cryptocurrency ATM market. Do you want to own and operate the ATM, own the ATM and contract with a third party for operation, or lease space for a third party to install and operate their ATM? Operation of the ATM includes stocking the necessary cash and/or servicing the cryptocurrency software, advertising costs, and machine maintenance. Broadly speaking, a business model involving ownership of the machine and control over its operation brings higher risk and reward – i.e., greater potential profit and increased regulatory compliance liabilities.
The licensing and regulatory requirements are other issues to deal with when entering the cryptocurrency market. In additional to physical security concerns for the ATM machine itself, common to regular ATMs, cryptocurrency ATMs have unique licensing concerns. The Pennsylvania Department of Banking and Securities (PennDBS) recently provided guidance stating that cryptocurrency ATM businesses are not required to be licensed under the Money Transmission Business Licensing Law because they do not involve the transfer of “money” to a third party. However, the Federal Financial Crimes Enforcement Network’s (FinCEN) guidance asserts that cryptocurrency exchange businesses are required to register with FinCEN as “money services businesses” under 31 U.S.C. § 5330 and adhere to the Bank Secrecy Act’s reporting and anti-money laundering obligations.
There is also heightened concern around the susceptibility for money laundering through cryptocurrency ATMs. Instances of drug trafficking and other criminal activity have been tied to Bitcoin ATMs throughout Europe and recent cryptocurrency thefts in Canada have led cities like Vancouver to propose a ban on them entirely. The limited regulation and relative anonymity of users around this newly sprouting industry invites unscrupulous individuals and businesses to engage in illegal activity, targeting unsuspecting business owners and ATM users.
Depending on your view on cryptocurrencies, Bitcoin ATMs and the like may be the wave of the future. In any case, these ATMs are fairly new and involve unique business and legal issues. If you want to enter this market, we suggest – as we do for any entrepreneur entering into a new business – that you consult with a knowledgeable attorney at the outset and throughout the life of your business venture.
John “JP” Prusakowski, Law Clerk at Griesing Law, contributed to this article.