Monday, December 20, 2021
Bitcoin and cryptocurrencies as a whole have become increasingly popular for investors at all levels of experience. With that, Bitcoin ATMs—physical locations where users can exchange cash for Bitcoin—have grown in popularity as well. They have understandably caught the attention of mainstream media outlets and regulators. Unfortunately, some of this coverage frames the situation in a manner that mischaracterizes Bitcoin ATMs and their usage. On November 9, 2021, CNBC published an article and aired an accompanying piece that myopically examines illicit use of Bitcoin ATMs but neglects to cover how they often provide greater tools to prevent such activity compared to cash or traditional money transfer methods. We aim to fill in those gaps while offering a path forward that includes industry-wide standards.
Cash2Bitcoin has multiple levels of defense in place to protect against the two illegal activities that the CNBC article discussed: scams where culprits trick individuals into sending them money and money laundering or transfers on behalf of nefarious actors. What underscores the majority of the actions that Cash2Bitcoin takes to prevent fraud is that they are voluntary.
Cash2Bitcoin also is registered with and complies with the regulations set out for money service businesses and is registered with the Financial Crimes Enforcement Network (FinCEN), overseen by the U.S. Department of the Treasury. As a part of this, it monitors transactions, files Currency Transaction Reports, and performs Know Your Customer due diligence on a regular basis. As an example of how extensive this is, Cash2Bitcoin flags accounts that reach certain thresholds in terms of frequency of transactions, total cash exchanged, and ATM usage for specific classes of individuals.
Many states require that prospective Bitcoin ATM operators undergo a detailed financial audit. Such audits assess not only the legitimacy of new businesses as a whole but consider their readiness to deal with issues that the financial industry regularly faces, such as fraud. In terms of protecting individuals, Cash2Bitcoin sets limits and employs monitoring activities similar to long-standing institutions. We disagree with the article’s assertion that operators allowing individuals to transact up to $900 just using a name and phone number is problematic. The U.S. Postal Service has much more lax requirements than this and allows individuals to purchase both domestic and international money orders totalling $3,000 before requiring an ID. As another example, individuals can purchase multiple gift cards in excess of $1,000 from local establishments with no ID.
Once individuals transact beyond $900, Cash2Bitcoin looks at transactions and customers with even greater scrutiny. Its compliance team uses a combination of law enforcement records, official ID cards, age, risk factors, and other markers to determine whether to allow people to continue using its machines. Even greater steps are taken to prevent money transfers to or on behalf of nefarious actors. Cash2Bitcoin uses tools that assess crypto wallets based on how likely they are to be involved in illicit activities, which automatically block transactions going to those individuals and ban the customers attempting to perform them.
As highlighted above, Cash2Bitcoin’s actions are either voluntary or stem from recommendations rather than firm rules. Regarding the latter, FinCEN and its auditors provide recommendations for steps ATM operators can take to improve their ability to prevent fraud. Because these are based on subjective interpretations of guidelines, individual auditors differ in what they recommend both to different companies and within the same one. This creates ambiguity and allows ATM operators to decide what preventative measures they should take based on their risk appetite. Unfortunately, many new companies in this space overestimate their ability to manage risk and therefore take on more than they should. Creating clear rules, rather than guidelines, would alleviate this issue.
Digging further into the issue of risk management, ATM operators are required to have compliance officers who oversee and institute mechanisms for preventing illicit activity. The rules mandating this afford too wide of latitude to operators in how they choose officers. FinCEN and states provide few to no requirements for experience, educational qualifications, certification, or even conflicts of interest in that regard other than minor continuing education requirements. Moreover, many operators employ third parties with as their compliance officers and often these third-party officers will work for multiple operators—creating conflicts of interest. An industry that seeks to protect consumers should, at the very least, have clear rules in place for how compliance offers are selected.
Financial audits and information sharing provide two more key lines of defense in preventing fraud. These audits inform regulators of whether and how much risk operators should take on. At the moment, such audits are not uniform across states and allow underprepared operators to enter the market without proper financial security in place. Once operators start up, FinCEN does not encourage information sharing through regulations as it does for traditional financial institutions. Section 314(b) of the U.S. Patriot Act allows financial institutions to share information with one another “in order to identify and report to the federal government activities that may involve money laundering or terrorist activity.” Without proper information sharing, an individual banned at one company for illicit activity will simply go to another. Many operators sit on a trove of data that they use to prevent fraud within their own systems, however, nefarious actors fall through the cracks because they are not empowered to share information.
Cash2Bitcoin takes these issues seriously and strongly recommends that regulators consider addressing them with fit for purpose regulatory instruments. Such schemes should be considered in coordination with the private sector to ensure they achieve a level playing field and maintain an appropriate scope.
As alluded to earlier, these scams and activities are not new and are performed using any number of means. In a December 2020 report, the U.S. Federal Trade Commission (FTC) reported that approximately one in four people who tell the FTC they have lost money to fraud say they paid with a gift card. From 2018 to 2020, people reported losing almost $245 million to scams involving gift cards. Out of the 362,267 fraud reports filed with the FTC in 2020 that detailed a payment method, only 3.4% listed cryptocurrency as the payment method. Other methods higher up on the list include credit cards, gift cards or reload cards, debit cards, payment app or service, and wire transfer.
Figure 1: Fraud Reports by Payment Method for all of 2020
Source
Understandably, with the drastic rise in Bitcoin’s value over time and press coverage of it growing, the number of scams involving cryptocurrencies is increasing. This comes as no surprise given the newness of cryptocurrencies and may persist until people gain a more complete understanding of the norms associated with them. Furthermore, because cryptocurrencies are a “hot” topic, media outlets gravitate toward negative coverage—such as scams—because this often generates more clicks and attention than positive coverage. As of 2021, the number of reports of fraud through cryptocurrencies is still relatively low compared to other methods, but the amount lost overshadows most other payment methods. It is not clear whether the FTC’s calculations include large organizations being defrauded, as is the case where data is held ransom for large sums of money. If so, this would greatly impact the data.
Unlike fraud through cash, gift cards, reloadable cards, and some other methods, ATM operators have an increasing number of tools at their disposal for tracking and even preventing it from happening. The number of tools at ATM operators’ disposal will continue to increase as more large financial institutions become involved in Bitcoin. It is unlikely that the same tools will become available to other forms of money transfer or asset purchase. For instance, it is unlikely that store clerks handling money transfers could effectively be trained to look for scams taking place in the same manner that ATM compliance officers are trained.
This ability to detect suspicious activity before it takes place offers a clue as to why governments around the world are considering instituting their own digital currencies. China, for instance, has been leading the way in developing and testing a digital currency of its own. The push toward a digital Yuan has garnered criticism on the basis that it will provide a way to further surveil its citizens. It is somewhat paradoxical then that people both criticise digital currencies for their apparent ability to enable illegal activities while acknowledging how traceable activities related to them can be. Notably, the United States Federal Research is slated to release a paper on the matter soon.
While Cash2Bitcoin cannot speak for other operators, it firmly believes that the measures it takes to prevent scams, laundering, and other illicit activities meet the challenge posed by them. As with most other business sectors, predictability and stability remain key in providing the best, safest services. To that end, it welcomes financial audits and recommends that states and regulators across the U.S. adopt uniform standards. If the issues highlighted here are addressed properly, Bitcoin ATMs offer greater protection for consumers and the interests of the public compared to other money transfer or asset purchasing methods.
Cash2Bitcoin aims to create seamless Bitcoin ATM transactions for consumers interested in Bitcoin, Litecoin, and Ethereum. Through partnerships with ISOs and merchants, its substantial network of Bitcoin ATMs continues to grow. This network extends throughout the United States in Connecticut, Florida, Georgia, Illinois, Indiana, Michigan, New Jersey, Ohio, Pennsylvania, and Wisconsin.
For more information, please visit www.cash2bitcoin.com |