December 21, 2022 2:09 pm in Bitcoin ATM

Bitcoin ATM Regulations: What You Need to Know

The world’s first bitcoin ATM became operational in Austin, Texas in 2014. Since that time, roughly 14,000 additional bitcoin ATMs have opened for business. The vast majority of these machines are located in the United States, but there are still ample opportunities to establish and profit from your own bitcoin ATM business. Entrepreneurs who are looking for a way to cash in on the continued popularity of cryptocurrencies can now purchase and own their own bitcoin ATMs, or host an atm as a small business opportunity. These machines are available for purchase through vendors like Lamassu, General Bytes and Genesis Coin.

Bitcoin is widely recognized as a decentralized currency that skirts around many financial regulations. However, according to the Bank Secrecy Act, financial institutions must assist the federal government with preventing and detecting money laundering activities. The interpretation of the BSA is determined by the Financial Crimes Enforcement Network, or FinCEN. FinCEN includes money-services businesses, such as bitcoin ATMs, as a subcategory of financial institutions. Even though Bitcoin is decentralized, bitcoin ATMs must comply with established regulations. In addition to meeting the rigorous requirements for FinCEN compliance, state licensing requirements, IRS audits and other issues must be addressed upfront and on an ongoing basis. To avoid getting in hot water with a government regulatory agency, you need to educate yourself thoroughly on bitcoin ATMs and take numerous steps to establish compliance before your kiosk is operational.

Financial Crimes Enforcement Network Registration

Within six months of establishing your first bitcoin ATM, you must register with FinCEN as an MSB, or money-services business. This is done through Form 107 and can be completed in less than an hour online. You will need to renew this registration every two years to remain compliant. After your registration is finalized, you are legally required to comply with the anti-money laundering requirements established by the Bank Secrecy Act.

AML Program Development and Implementation

An important aspect of compliance with the BSA is to create and implement an anti-money laundering program for your bitcoin ATM. This AML program will be written and will outline all of the efforts that you intend to take to prevent money laundering and terrorist funding efforts. The program also must define who your AML compliance officer is. Your compliance officer is the person who will oversee the implementation and future developments of your AML program. In addition, your written AML program needs to go into detail about how you intend to train and provide continuing education to your staff on Bank Security Act compliance. Your employees need to be able to identify who the owners of a legal entity are, how to identify suspicious activities, verification procedures and more. In addition to these requirements, your AML program must be independently audited and tested annually.

To comply with BSA regulations, your bitcoin ATM business must keep detailed records of every transaction processed. Keep in mind that you must use this collected information to file the required reports with FinCEN. As part of this key requirepment, you must take steps to Know Your Customer. This means that you must adequately confirm the identity of every customer before a transaction starts through an established KYC protocol. The KYC protocol has been created by FinCEN and may be updated periodically. One important aspect of the KYC protocol is to identify individuals who are being monitored by the federal government because of their known affiliations and activities of concern. A list of known persons of interest is maintained by the Office of Foreign Assets Control. It is your responsibility to monitor that list and to actively screen your bitcoin ATM customers. You must have a reasonable and effective plan in place to do so, and many bitcoin ATM operators will use third-party services to remain in compliance.

In addition to the KYC protocol, transactions must also be monitored closely. Customers with one or more large transactions must be reported through a currency transaction report. You must also actively monitor your bitcoin ATM transactions for signs of potential tax evasion, money laundering or other financial crimes. If any red flags are detected, a suspicious activity report must be filed. One of many examples of suspicious activities would be an individual making multiple transactions at your bitcoin ATM in short succession to avoid the $10,000 daily threshold for triggering a report.

Creating and updating an anti-money laundering program as needed are major chores, so many bitcoin ATM owners engage the services of a lawyer or knowledgeable consultant to do the work. Your selected expert will identify the vendors or service providers whose services are needed to remain compliant, and they usually will establish these services on the operator’s behalf. Such services should be in place before the bitcoin ATM is operational.

It is crucial that your AML program is established and has been tested before your bitcoin ATM is operational so that you do not land in legal trouble. The unfortunate reality is that some people have used and continue to use these ATMs for nefarious purposes. While such activities have given bitcoin ATMs a bad reputation to a degree, these ATMs are legitimately useful to others. More than that, operating a bitcoin ATM can be lucrative and present a sound opportunity for profiting from the rise of cryptocurrencies.

IRS Documentation Requirements

While FinCEN is the main agency that is tasked with Bank Secrecy Act compliance, other government agencies hold compliance enforcement authority as well. One of these agencies is the IRS. Specifically, the IRS has the authority to require documentation showing your BSA compliance through an audit. In fact, many bitcoin ATMs operators have already received subpoenas. The volume and level of detail in the documentation required by the IRS for full compliance are significant. Some smaller operators have not established the same level of infrastructure and bookkeeping that larger operators have in place, and this has already created issues. The costs and time requirements for related services can play a role in the overall benefits of running a bitcoin ATM business and should be known upfront.

State Licensing Requirements

In addition to the federal regulations for operating a bitcoin ATM kiosk, states have their own regulations that operators must follow. Each state has its own money transmitter licensing requirements, and failure to comply with those requirements can result in imprisonment. These money transmitter requirements vary considerably. For example, in New York, the New York State Department of Financial Services requires all virtual currency ATM operators to be licensed through BitLicense. In a few states, statutes are in place that specifically establish that virtual currency transactions are not considered to be money transmissions. A money transmitter license may also be required in order to operate a bitcoin ATM based on how the ATM is stocked with cryptocurrencies. In addition to the licensing requirements, you may need to maintain a surety bond. Because these requirements vary, it is critical that you carefully review and fully understand the state regulations that pertain to your bitcoin ATM. State licensing could take anywhere from a few months to more than a year.

Before Launching

These machines are heavily regulated at both the state and federal levels. Because strict compliance with these regulations is imperative, you should thoroughly educate yourself on these requirements and develop a plan for achieving and maintaining compliance. While there may be more documentation, monitoring and reporting required to operate a bitcoin ATM than you initially were aware of, this may still be a solid opportunity for investors and entrepreneurs.