Bitcoin ATMs Are Popular With the Unbanked, But the Regulatory Future Is Unclear

A trend is emerging in the Bitcoin ATM industry. Demand for the services among the underbanked and unbanked has seen steady growth in the two years since the industry's first Bitcoin ATMs—often referred to as Bitcoin Transaction Machines, or BTMs—were installed.

"These customers may have a passport and valid ID but may not be interested in setting up a local bank account," Chris McAlary, CEO of Coin Cloud, a Bitcoin ATM operator in the western half of the continental U.S., said of underbanked customers.

The Federal Deposit Insurance Corporation (FDIC) describes the unbanked as adults without an account with a bank or other financial institution. The FDIC estimates 10 million households in the U.S. are unbanked or underbanked. Estimates posit that approximately two billion people are unbanked globally.

Most are American born, but immigrants make up a considerable percentage overall. Research suggests immigrants who have lived through a banking crisis in their home countries are less likely to open a U.S. bank account.

Coin Cloud customers purchase on average $250 worth of bitcoins and sell on average $500 at the machines, according to McAlary. He observes that some individuals use smartphones for their finances—perhaps by downloading a Bitcoin wallet onto it—in place of a traditional bank account. To be sure, the machines don't work exactly like a traditional ATM. Instead, they are more akin to a vending machine for the digital world or a brick-and-mortar Bitcoin exchange that looks like an ATM.

Today, there are approximately 600 working Bitcoin ATMs, though that number fluctuates as some machines go offline and new ones are deployed. In recent months, many well-financed operators have moved into the space to run networks of Bitcoin ATMs, sometimes on a worldwide basis. The industry has grown so large, operators in Europe employ armory cash pickup services, according to General Bytes' CEO Karel Kyovsky. The Czech-based General Bytes, the third largest Bitcoin ATM distributor, distributed 95 machines mostly across Europe.

Bitcoin ATM distributors and operators, in the US and Europe, must operate within the purview of know your customer (KYC) and anti-money laundering laws (AML). KYC refers to how a business verifies the identity of its clients. AML refers to the procedures, laws or regulations to stop money laundering.

Operators running networks of Bitcoin ATMs "is pretty different from 2014 when Bitcoin ATMs were mostly operated by individuals or in small set ups," CoinatmRadar.com administrator, who goes simply by 'Vlad', told Motherboard. CoinatmRadar.com is the central hub for all things Bitcoin ATMs, and Vlad is probably one of the foremost objective experts in the world on the space.

"I think in 2016 this trend will continue to strengthen with more and more professional businesses entering the market, as well as business scale increase for existing operators," he said. The industry has stood the test of time, thus far, as Bitcoin ATMs look to be one of the easiest ways to purchase digital cash.

Bitcoin ATM industry sources agree that not much happened in the space over the past year in terms of bitcoin volume or developments. The number of Bitcoin ATMs still increased from 330 to approximately 550 bitcoin machines. This year, the global number of Bitcoin ATMs has reached approximately 640, though just how many of those function correctly is unknown. Vlad does much of the heavy lifting to synthesize what's known.

For the Bitcoin ATM market to continue growing, like other Bitcoin-related businesses, the Bitcoin price must stabilize. In their short tenure, Bitcoin ATM's have proven an instrumental piece of the Bitcoin ecosystem. When it comes to sending remittances (which Bitcoiners championed as a use for Bitcoin ATMs), and many other money transfer services, Bitcoin ATM's generally don't yet make sense compared to the competition due to their high fees. The average fee is currently 8 percent.

"The recipient also needs to convert cryptocurrency to fiat which could mean another 6 percent on the other side," Vlad explains. This means it could cost as much as fourteen percent to transact at a Bitcoin ATM. Bitcoin price volatility, furthermore, could cost the sender and/or receiver even more.

Zach Harvey, co-founder of the second largest Bitcoin ATM distributor Lamassu, believes the more Bitcoin ATMs there are out there, and more people aware of them, the more useful they will become, and that fees will decrease.

He added: "There are many more potential services that can be carried out on a BTM, once users expect to have them around."

Yet, there remain hidden costs other than high fees and anti-money laundering procedures for the Bitcoin ATM industry. For instance, it can be difficult to find a bank that will work with a customer depositing a lot of cash—a byproduct of serving the underbanked. Thus, Bitcoin ATM operators must find a workaround, which could further increase costs.

"Another factor is the costs associated with running such a business," Vlad said. "Hardware costs, rent, liquidity frozen to facilitate operations, compliance policy development and conducting customer checks to follow legal requirements. All this adds to the final costs and is reflected in the fees."

Members of the Simon Fraser Bitcoin Club unveiling a Bitcoin ATM at SFU Vancouver. Image: Flickr/[Simon Fraser University](Members of the Simon Fraser Bitcoin Club including Michael Yeung, Founder and President, and Jeffrey Chen).

Manufacturer Lamassu has seen Bitcoin ATM companies like Robocoin fall, and ones like Genesis grow to become the largest distributor of Bitcoin ATMs. Harvey told Motherboard that his company—like many in the space—foresaw 2015 as the "year of remittances." The company, founded in New Hampshire, developed a remittance system, but learned the remittances were not yet price-effective for people sending money across borders. This forced them to focus on their core business of cash-to-Bitcoin and Bitcoin-to-cash; in other words, serving the underbanked and unbanked.

The amount of privacy consumers enjoy varies from machine to machine as the industry, and regulators, grapple with the implications of the underbanked and unbanked using Bitcoin ATMs. Vlad believes the industry has come a long way since the days of the failed Las Vegas distributor, Robocoin, which introduced palm scans and other know your customer measures in an attempt at compliance.

"Nowadays, there is more of a balance between the customer's privacy and legal requirements," Vlad said.

Currently, there is usually some amount of bitcoins that can be purchased sans KYC verifications; then there is a limit after which a phone number has to be verified (SMS); and then possibly a higher limit, usually several thousand dollars, where an ID scan is required.

"Of course," Vlad added, "there are extreme cases on both sides, when Bitcoin ATMs require users to be fully verified from the very first dollar exchanged, or on the opposite end of the spectrum where there are no limits nor checks except for the liquidity of the machine's operator." Vlad estimates the average transaction on Bitcoin ATM's worldwide is approximately $200, and the medium about $70-100. Other operators imply similar.

The intersection of the underbanked, and Bitcoin, means that the nature of the Bitcoin ATM industry will differ from jurisdiction-to-jurisdiction. According to Vlad, Canada appears to be "quite free." But, the future of machines in the US, and particularly New York, land of the BitLicense, remains less clear.

A BitLicense refers to a special business license for virtual currency implemented by the New York State Department of Financial Services (NYSDFS). So far, Circle Internet Financial is the only Bitcoin-related business to have received a such license. Despite this, there are approximately sixty Bitcoin ATM's in the State of New York. A large share of these are operated by a national company, Coinsource, who declined to give comment about the Bitcoin volume at its machines.

For now, while manufacturers across the board are creating the tools needed to verify identities, most leave it up to the operators themselves—the ones stocking the machines with cash and dealing with customers—to implement procedures themselves based on money transmission laws in the relevant jurisdiction. These procedures could directly impact those who need the Bitcoin ATMs the most and don't mind paying the extra fees for a bit of privacy—the unbanked and underbanked.

"The unbanked and underbanked are using our services," Moe Adham, co-founder of the fourth largest distributor, BitAccess, told Motherboard. "Such activity is common for our machines worldwide."