Bitcoin Depot ATM

Bitcoin ATM Regulatory Requirements in USA

With a lot of interest in the industry many entrepreneurs want or plan to start a bitcoin ATM business. We at CoinATMRadar get many support requests for information how to do it, what are the steps etc. Here is a good overview of what are important aspects of operating bitcoin machines.

One of the main topics to research is regulation and what is needed to be done to properly register such a business. This is very important to do in right way from the beginning if you plan to do it professionally long-term and with potential to grow your bitcoin ATM network in the future.

Compliance

Disclaimer: Information provided in this article is a general overview of current regulation found in public sources. It should not be taken as a legal advice. It is recommended to contact local lawyer in the area where you plan to operate machines. You can find several contacts at the end of this post.

Regulation varies from country to country. Although we are in the year 9 since Bitcoin inception, regulatory-wise it is still not clear in many countries what kind of registration is required. You can check legal state of Bitcoin regulation on the Wiki or in recent Bitcoinmagazine post.

Right now 60% of all worldwide bitcoin ATMs are located in USA, 16% in Canada and 5% each in United Kingdom and Austria. These four countries make a total of about 85% of all machines. In this post we look at regulation in USA as the leading market.

Overview

Bitcoin ATM regulation happens in the U.S. on two levels: federal and state levels. Primary federal law is Bank Secrecy Act (BSA). Operators need to register with FinCEN and have AML compliance policy in place. The main purpose of this regulation is to help prevent money laundering, and other financial crimes. State level regulation varies from state to state, and targets requirements to register for money transmitter license (MTL) or money service business (MSB). Most of the states will also require a surety bond to run bitcoin machines. For an approximate estimation of costs — please check Legal costs section of post about revenue and costs.

Federal level regulation

Regulatory framework on federal level is defined by Financial Crimes Enforcement Network (FinCEN) and as operator one needs to register as MSB with FinCEN. As mentioned above the purpose of law on federal level is to detect and prevent money laundering, terrorist financing, tax evasion and other financial crimes. Operators need to keep track of records of transactions, conduct and collect identification information and also report information to agencies under particular circumstances.

Clarifying the application of FinCEN regulation to “virtual currencies” regulator defines three categories of persons / businesses: users, exchangers and administrators. While “users” are not considered MSB, exchangers and administrators are considered as such and has to properly register. Bitcoin ATM operators are referred to “exchangers” group, hence need proper registration.

Registration with FinCEN itself is pretty straightforward, and can be done online. Registration needs to be done within 180 of establishing MSB business and then renewed every 2 years. It is a federal crime to operate without proper registration, and subject to large fines and/or imprisonment if it was done as “wilful violation”.

Apart from registering with FinCEN bitcoin ATM operator has to develop its own KYC/AML compliance policy. This document doesn’t need to be provided to FinCEN during registration, however it should be available on request. The main purpose of such a policy is to prevent your bitcoin machine being used to money laundering. AML program has to address the following items, also known as “4 pillars”:

  • Define Policies, Procedures and Internal Controls. Incorporate policies, procedures and internal controls reasonably designed to assure compliance with the BSA and its implementing regulations. These policies need to address risk size expected by operator based on conditions and area of operation, various transaction monitoring and documenting techniques etc.;
  • Dedicated Compliance Officer.  Designate a person to assure day-to-day compliance with the program and the BSA and its implementing regulations. This should be a person with expertise in the field. Moreover, such an officer should have relative independence and authority within organization. This should be a person, who doesn’t obtain other functional roles, e.g. to eliminate conflict of interest, while limiting transaction due to prevention measures will potentially reduce revenue volume of operator;
  • Employee Training.  Provide education and training of appropriate personnel concerning their responsibilities under the program, including training in the detection of suspicious transactions, to the extent that the MSB is required to report such transactions under the BSA;
  • Independent Audits.  Provide for independent review to monitor and maintain an adequate program. This can be done by other employees / team in the organization, as well as by third-party consultancy service providers.

Once the program and processes are implemented — it is recommended for operator to do full test of transactions flow and documenting all steps. Tests need to include checking of set thresholds and limits as well as all KYC verification procedures and tracking and documenting of customers data. Manufacturers of ATMs provide integrated solutions in their software. It is recommended to check with each provider what the implementation is, so that it cover needs of being compliant with law.

State level regulation

On state level regulators have another requirement to register as money transmitter. This regulation varies from state to state, while some states being more relaxed, some are very strict in this regard, e.g. Bitlicense in NY. Main regulatory purpose of this level of regulation is to protect consumers, e.g. when operator becomes a custody. In most cases operator will need to provide surety bond, which potentially might be used for clearing of transactions, if operator quits activity. However, some state regulators, e.g. restrictive Bitlicense, also regulates anti-money laundering activities, which generally a part of federal level regulation.

The following updated table conducted by coincenter.org provides a great overview on regulatory attitude in all states (full screen table):

Also a good overview on state regulation for bitcoin ATM operators is provided by Frost Brown Todd’s Blockchain and Digital Currency Group.

In general there are states which don’t require MTL and they either accept MTL from other states, e.g. Arkansas, or don’t pose such requirements at all under particular conditions (Illinois, Kansas, New Hampshire, North Carolina, Tennessee, Texas, Idaho, Kansas). Important factor here is how the transactions and funds flow is organized by operator. There are generally three main ways how operators can conduct transactions (read more details how bitcoin ATM transactions can be organized):

  • Periodically replenish in bulk own hot wallet, where from bitcoins or other crytpocurrency sold to separate customers later on;
  • Sell bitcoins from own hot wallet, however, at the same moment transaction occurs automatically a mirror transaction is conducted at exchange for the same amount. Funds then are topped up to hot wallet to replenish balance, either immediately, or periodically. Technically, even though transaction happens on exchange at the same time, bitcoins are still considered sold from operator’s own funds and wallet;
  • Sell and send bitcoins directly from exchange or other third-party providers. Although only few exchanges support this option due to KYC/AML reasons.

While selling directly from third-parties makes operator money transmitter for obvious reasons, options 1 and 2 may be a reason to be exempted from regulation.

Some states are defining clear regulation, which require or will require operators to comply with MTL scheme: Alaska (House Bill 180), California (AB 1123), Connecticut (HB 6800), New York (BitLicense), Washington.

The process of registration and requirements vary for different states, however, usually include requirement to provide surety bond, due diligence / disclosure of operator’s net worth, and always state license fees payments. To give some ranges, filing fees vary in about $300-5000 interval, net worth requirements vary from $100K to $1MM or more, surety bond requirements are from $100K to several millions (e.g. in CA up to $7MM).

Contacts for legal advice

There are several known contacts which we shared whenever people ask about who can provide advice:

Summary

Bitcoin ATMs installations are growing fast. Many new operators entering the market. In order to comply with regulation one needs to carefully review regulatory basis before jumping into this business. In the U.S. bitcoin ATM operators are regulated on two levels: federal level (FinCEN — AML/KYC) and state level (MTL). While federal process and procedure are clear, state law varies from state to state and needs to be investigated with local lawyer during business evaluation phase.

Sources and further read material

If you know legal requirements in Canada or United Kingdom and would like to contribute information, please contact us.

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2 thoughts on “Bitcoin ATM Regulatory Requirements in USA

  1. Do you have insights into Canadian banks willing to work with ATM companies? Been looking really hard at this, and not finding any ground.

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