Bitcoin ATMs: The Good vs. The Bad
Apart from being a public health emergency, Covid-19 exposed and exaggerated many societal, economic, and political issues. The inequality has been exacerbated as those in the “knowledge economy” benefited from access to technology and flexible work arrangements. Investors are also better off with U.S. stock markets sitting at or near all-time highs. On the other end of the spectrum are the minimum wage and blue-collar workers, small businesses and, often, minorities. At the same time, fiscal and monetary response to the pandemic has raised concerns about inflation and potential devaluation of most major currencies. As countries around the world, including the U.S., experience significant economic shocks, many are turning to Bitcoin and crypto platforms.
Investors increasingly view Bitcoin as a safe haven asset, better suited to provide inflation protection than gold. Bill Miller, Paul Tudor Jones and Stan Druckenmiller have all disclosed positions in Bitcoin based on this narrative. Furthermore, Rick Rieder, chief investment officer of fixed income at BlackRock has recently said that Bitcoin has the potential to “replace gold to a large extent.”
For many people, Bitcoin ATMs (BTMs) represent the only opportunity to participate in this evolution of financial services. It’s therefore not surprising that as demand for Bitcoin surged during the pandemic, so did the number of BTM installations. As of November 11, installations rose by 85%, exceeding last year’s 50% rise, according to Coin ATM Radar.
Blockchain and crypto products, including BTMs, are increasingly necessary in today’s world. BTMs, for example, can be found in easily accessible places like convenience stores and gas stations, reducing barriers to entry. Many BTM operators are also using their business for good. CoinFlip, the world’s largest BTM operator, aims to “provide financial services to unbanked or underbanked customers” and its COO, Ben Weiss, believes that the future of crypto is to empower “more people with greater access to services by removing intermediaries.”
The issue of financial inclusion is, without a doubt, one of the most urgent issues we are facing today. In developed and developing economies alike, billions don’t have access to essential financial services. In fact, the most recent data shows that globally, more than 1.7 billion people are unbanked. Even in the U.S., 22% of Americans are either unbanked or underbanked. The cost of financial exclusion often falls on the most vulnerable people, with minorities bearing the brunt of it. Without access to necessary financial products, many struggle to pay bills, insure themselves or invest in the future.
This is where BTMs offer an innovative and effective solution. They are easy to use, convenient and inclusive. They provide an essential service for many Americans who by choice or necessity, still prefer cash over plastic. Most importantly, and this deserves special attention, they offer a cheap way for many unbanked and underbanked to invest and preserve their money.
One of the reasons Bitcoin has done well as an investment is its monetary policy. Only 21 million Bitcoins will ever be created. The current rate of inflation is 1.8%, below 2.5% for gold, and is programmed to decline over time and will eventually reach 0. In comparison, traditional currencies inflate at a much higher rate. $1 in 1800 is now worth more than $20, meaning that the purchasing power of the U.S. dollar has gone down substantially over time. This situation is like to get even worse due to substantial monetary and fiscal stimulus to address the Covid-19 pandemic.
Bitcoin has plenty of other desirable characteristics that make it an excellent investment. Institutional demand is picking up on the back of the “digital gold” narrative. It’s scarce and can’t be censored. It’s the favorite asset of millennials and generation Z. According to research by Bank of America, income of Gen Z is expected to reach $33 trillion by 2030, an increase of 500%. Furthermore, millennials and Gen Z are likely to inherit nearly $78 trillion of wealth with some of that capital likely flowing into Bitcoin. Using BTMs, the unbanked and underbanked people around the world can participate in this paradigm change.
When it comes to operating Bitcoin ATMs, there are major differences between good and bad operators. Good operators provide a convenient and safe experience, while bad operators can get you in trouble with authorities and steal your money.
In the U.S., operating a BTM requires registering as a Money Service Business (MSB). This means complying with the Bank Secrecy Act and establishing Anti-Money Laundering (AML) and Know Your Customer (KYC) protocols. Daniel Polotsky, CEO of CoinFlip, stated that his company requires AML and KYC for all customers. Other major BTM operators in the U.S., like LibertyX and Coinsource, also emphasize the importance of these checks and balances. LibertyX, for example, requires customers to complete KYC checks on the app, before using their BTMs. They also ask users to provide a wallet address and a verified purchase location.
These measures, while sometimes frustrating, are necessary to protect consumers. CoinFlip’s Ben Weiss recently stated that “creating strong consumer protections will keep bad actors from competing with legitimate products and help the crypto industry gain legitimacy in the general public’s eyes.”
Unfortunately, there are plenty of bad actors in the crypto space, many of whom engage in money-laundering and terrorist financing using BTMs. Just recently, John Fort, Criminal Investigation Chief for IRS, said that IRS is working with law enforcement to investigate illegal usage of cryptocurrencies through BTMs. According to him, BTM operators are “required to abide by the same know-your-customer, anti-money laundering regulations, and we believe some have varying levels of adherence to those regulations.”
This problem is not unique to the U.S. Last year, a criminal gang in Spain used two BTMs to launder cash and pay drug suppliers in Columbia. Just recently, German Federal Financial Supervisory Authority, known as BaFin, seized 17 illegally operated and unlicensed BTMs. In its regulatory efforts, BaFin went a step further, making it illegal to provide any service, like broadband connection or electricity, to unlicensed BTM operators.
While most U.S. BTM operators comply with existing rules, the government has been slow to implement progressive regulatory reforms due to the outdated perception that Bitcoin is primarily used for illicit activities. Lack of regulatory clarity is curbing innovation and preventing BTM operators from creating economic opportunities. Instead of streamlined, federal regulatory framework for Bitcoin and other crypto assets, the U.S. still has dozens of state-level regulations. This convoluted framework is simply inadequate, restricting innovation and failing consumers along the way.
Many BTM operators agree. According to Ben Weiss, “the biggest issue with current regulations is a lack of clarity. By developing a straightforward framework, governments encourage investment and industry growth.”
Financial inclusion has always been important, but even more so today. As the Covid-19 pandemic pushes more and more people into poverty, they need access to a fair financial system. Bitcoin ATMs are part of the solution, providing easy access to essential financial services. However, lack of regulatory clarity is weakening consumer protections and limiting the ability of the blockchain industry to innovate. The U.S. government should work with industry leaders, like Ben Weiss of CoinFlip, to develop a more robust regulatory framework. Otherwise, U.S. companies will move overseas, leaving millions of Americans behind, and only widening the wealth and inequality gaps.