What stores need to consider with bitcoin ATMs

(Editor's note: An earlier version of this article ran on Kiosk Marketplace, an ATM Marketplace sister publication.)

Demand for bitcoin continues to grow. One sign of proof beyond the associated and often-hyped market volatility is the ongoing explosive growth seen in the number of bitcoin ATMs available to consumers across the globe.

According to data from Coin ATM Radar, in March the number of machines available worldwide stood at nearly 17,000, which was up nearly 60% from March 2020. Specifically, in the U.S. over that time period, the number of machines spiked 177%, or from 4,945 machines to 13,699 as of March 10, 2021. Keep in mind the first ever of these machines was installed only seven years ago.

Given this, convenience stores are in a prime position to add bitcoin and cryptocurrency ATMs to their service offerings. Bitcoin offerings can generate new revenue opportunities while also driving foot traffic, leading to potential cross-selling opportunities. Here are five things convenience store and gas station operators should consider before choosing a cash-to-crypto ATM provider.

While choosing a bitcoin ATM provider might seem like a simple task, this young industry has little-to-no regulatory oversight, leading some policymakers to refer to cryptocurrency as the "Wild West." Retailers should consider the potential risks to their business and their customers' safety before offering cryptocurrency in their store with any cryptocurrency ATM provider.

1. Bitcoin ATMs: Compliance 101

As non-bank financial institutions, all money services businesses, known as MSBs, are required to comply with the rules and regulations enforced by the Financial Crimes Enforcement Network. Cash-to-cryptocurrency companies and bitcoin ATM providers are defined as MSBs by FinCEN and must adhere to regulatory compliance requirements.

However, the basics of these guidelines were written decades ago and well before bitcoin was created. These guidelines are not enough to protect stores and consumers from fraud and other financial crimes. A cryptocurrency ATM provider can go further to deter bad actors and help keep retailers and consumers safe.

For example, retailers should choose a bitcoin ATM or cryptocurrency provider that is Bank Secrecy Act/Anti-Money Laundering-compliant. The best cryptocurrency MSBs handle all aspects of compliance and reporting, enabling brick-and-mortar partners to focus on their business.

This can also stop unnecessary service interruptions due to fraud investigations, and not to mention stop the actual fraud from happening. During the fourth quarter of 2020 and first quarter of 2021, consumers reported losing more than $80 million to cryptocurrency scams, according to the FTC. That's more than 10 times the amount from the same six-month period a year earlier. In New Jersey alone, over the past few years consumers across the state were scammed into spending hundreds of thousands of dollars at these ATMs, according to a recent report from the state's top corruption watchdog

Strong and rigorously enforced BSA/AML-compliance policies can keep businesses safe from regulatory penalties from FinCEN and other law enforcement agencies, while keeping consumers safe from fraud. Of course, strong compliance practices and policies typically equate to a better reputation for any business. When it comes to the bitcoin ATM space, a great reputation makes it easier for businesses hosting cryptocurrency products to offer even more of these types of services to their customers.

2. Strong regulatory relationships

When looking at a cryptocurrency provider whose AML-compliance team has no functional relationships with regulatory authorities and banks, retailers should proceed with caution. It is smart to make sure the cryptocurrency provider is audited annually by an experienced independent third-party auditor. Store operators should also evaluate the reputability of their independent auditor.

3. Fraud protection over bottom-line revenue

Cryptocurrency providers that value revenue over protecting their customers pose a severe conflict of interest. The right fit for a business is not necessarily the provider that pays the most. Businesses of course should avoid creating partnerships with an unethical or illegal enterprise that prioritizes revenue over protecting its customers and business partners.

If the provider allows anonymous transactions of any kind, that should be a red flag for money laundering and customer fraud. All transactions should be verified with personally identifiable information that can be validated. We also recommend following strong "Know Your Customer" protocols and using resources from the Office of Foreign Asset Control.

4. Financial sector experience

The best cryptocurrency ATM providers also have management teams with robust backgrounds. To build a sustainable company in the bitcoin and cryptocurrency industry, teams need substantial experience within the banking industry.

What makes many cryptocurrency companies particularly prone to having an inexperienced management team is the sheer newness of the cryptocurrency financial space. To be successful, cryptocurrency providers need to collaborate with banks, state regulators and law enforcement.

5. Questions to ask

Businesses should have a list of questions ready before meeting with potential bitcoin ATM partners. Here are some examples.

• Do you allow customers to transact anonymously without an ID?
• What systems do you use to verify your customers' identities?
• How do you block transactions and ban customer accounts tied to criminal activity such as human trafficking, child exploitation and terrorist financing?
• What protocols do you have to prevent fraud, and how many fraud specialists do you employ?

As is the case with most significant technological advancements and movements, the regulators and lawmakers have had some challenges keeping pace with the cryptocurrency market. If cryptocurrency is to one day be as safe as any other form of payment, more work needs to be done. The bar needs to be significantly raised and enforced in such a way as to make it nearly impossible for any "rotten apples" to sustain their illicit businesses.

As many of us in the industry continue to work toward that goal, businesses should remember that all cryptocurrency ATM providers are not created equal. In other words, what retailers don't know about their bitcoin ATM provider can cost them, and it can also end up having a negative impact on their overall business and society. This is why it is important for them to do their homework before signing on the dotted line.