Bitcoin ATM Growth May Be a Boon for Money Launderers

As the number of bitcoin ATMs soars, one crypto analytics firm suggests they are increasingly being used to sidestep anti-money laundering (AML) controls.

In its Spring report, published earlier this month, analytics company CipherTrace found bitcoin ATMs were frequently used to send funds to “high-risk exchanges” – trading platforms the company considers to be known for facilitating criminal activity and money laundering.

“The percentage of funds sent to high-risk exchanges from U.S. BATMs [bitcoin ATMs] has seen exponential growth, doubling every year since 2017.” the report reads. While approximately 2% of U.S. transactions went to high-risk exchanges in 2017, that number is now knocking at the 8% mark.

While they may somewhat resemble a cash-based machine, a bitcoin ATM enables people to buy and sell bitcoin as well as other cryptocurrencies directly from an exchange, using bank cards or even hard cash. Crucially, users don’t need to have a digital wallet: The machines create them, providing users with printouts of the wallet addresses and private keys.

CipherTrace also highlighted that the vast majority of U.S. bitcoin ATM transactions in 2019, around 88%, sent funds to offshore destinations.

“[B]itcoin ATMs are likely to be the next major regulatory target,” the report predicts.

This coincides with an explosion in the number of new bitcoin ATMs coming to market. Globally, there are roughly 60% more installed now than there were this time last year, according to Coin ATM Radar. The current figure of over 8,300 machines is up from around 5,000 in June 2019.

What’s also interesting is the rate of installations has doubled since the start of 2020. While around 1,000 more were added between June and December 2019, in the past six months or so another 2,000 new ATMs have gone online.

Since March alone, more than 1,000 new ATMs have been installed. Around about a 100 more have come online in the last week alone. Roughly 6,200 – two-thirds – of total units are in the U.S., according to Coin ATM Radar.

As recently as Monday, bitcoin ATM operator LibertyX said users would also be able to purchase bitcoin from over 20,000 retail locations across the U.S., including from the 7-Eleven convenience chain.

Bitcoin ATM operators insist they are doing all they can to follow regulations. ATM services in the U.S. must sign up with the Financial Crimes Enforcement Network (FinCEN) as a money service business and are supposed to keep records of their transactions, follow know-your-customer (KYC) protocols and report anything suspicious to the authorities.

LibertyX co-founder and CEO Chris Yim said customers had to complete various KYC checks on their app before they could use the terminals. The ATMs also require the user provide a wallet address and a verified purchase location before the bitcoin is even sent.

Coinsource, which owns and operates just under 500 such ATMs across the U.S., has also emphasized its commitment to ensuring it has all the right protections in place.

“Compliance is key. Once we learned how important compliance was … we obviously invested heavily in building our AML and KYC program and then staffing it correctly with experts that could support us in the venture,” said CEO Sheffield Clark in late 2018.

But there are still some that don’t comply. Back in August 2019, a 25-year-old bitcoin trader in Los Angeles pleaded guilty for not registering his bitcoin ATM business with FinCEN and for laundering up to $25 million-worth of funds for criminals, including drug dealers.

Bitcoin ATMs are likely to be the next major regulatory target.

Also last year, police in Spain reported a local criminal gang involved in the international narcotics trade had effectively bypassed European AML controls by laundering cash through two bitcoin ATMs and use the “clean” crypto to pay suppliers in Columbia.

Speaking to CoinDesk, Tom Robinson, co-founder and chief scientist at analytics company Elliptic, said the passing of FATF guidance dubbed the “Travel Rule” last year means that stronger AML/KYC requirements for crypto businesses are now being implemented around the world.

Elliptic is working with many bitcoin ATM operators who have concerns their terminals are being used for money laundering, Robinson said. And while regulation is gradually being implemented, he still has concerns about how well some of this will apply to bitcoin ATMs.

“The situation is certainly improving, but it will take time to ensure that these measures are applied globally,” he said.

For LibertyX’s Yim, bitcoin ATM operators still have to make a choice on how closely they want to protect user privacy while remaining regulatory compliant.

“What I see is a risk spectrum across competitive markets,” according to Yim, “some BTM operators are okay with the potential increased regulatory scrutiny.”

But, he said: “It’s a fine balance between respecting user’s privacy and staying proactive on compliance.”