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This week, the Financial Conduct Authority (FCA) announced that it is considering enforcement action against Bitcoin ATM operators that operate outside the UK’s cryptocurrency regulatory regime.
On February 14, the FCA indicated that it had received information from the police in Leeds, England, about Bitcoin ATMs operating in the city not having the appropriate FCA registration.
The statement said the operators had been issued cease and desist orders and that the FCA was considering further enforcement action against these unregistered Bitcoin ATM service providers.
This news follows an announcement last March, when the regulator warned the public that it had not approved any applications from UK-based Bitcoin ATM operators to register their services under the FCA’s Anti-Money Laundering and Financing of Terrorism (AML/CFT) regime .
Consequently, according to the FCA, none of the Bitcoin ATMs currently scattered across the UK are authorized to operate there and could face enforcement action.
This is not the first major regulatory action involving Bitcoin ATMs. Last year, the Monetary Authority of Singapore (MAS) banned the installation of crypto kiosks in public places in Singapore, in order to protect consumers.
These actions raise questions about the risks associated with Bitcoin ATMs and the tools available to allow stakeholders—including law enforcement, crypto exchanges, and Bitcoin ATM vendors themselves—to manage those risks.
In this article, we review the perceived risks and realities of Bitcoin ATMs and consider how investigators and compliance teams can respond.
Bitcoin ATMs: Connecting the Worlds of Cryptocurrencies and Cash
Bitcoin ATMs are a key mechanism for connecting the worlds of cryptocurrency and cash, helping to bridge the worlds of digital and paper money. With Bitcoin ATMs, a user can buy cryptocurrencies with cash or can withdraw cash against their Bitcoin wallet balance.
There are more than 38,000 Bitcoin ATMs located around the world. Most of them are in the United States, followed by Canada, Spain and Australia.
Often installed in convenience stores, gas stations, supermarkets, exchange offices and other outlets, crypto kiosks allow anyone to access crypto with cash in their pocket. It is precisely because of this ease of use and accessibility that proponents of Bitcoin ATMs point to them as facilitating financial inclusion, or the ability to provide digital financial services to a population that relies heavily on cash and has no access to banks.
One common misconception about Bitcoin ATMs is that they are only used for crime. In fact, there are a number of leading Bitcoin ATM service providers that have committed to complying with regulatory requirements, including AML/CFT measures.
For example, in the US, crypto exchanges such as Coinsource, Digital Mint, and CoinFlip are registered with the US Treasury’s Financial Crimes Enforcement Network (FinCEN) as Money Services Businesses (MSBs). In 2018, Coinsource became the first Bitcoin ATM provider to receive a BitLicense from the New York Department of Financial Services (NYDFS), a regulatory stamp of approval that is notoriously difficult to obtain.
The leading Bitcoin ATM providers have also formed an organization known as the Cryptocurrency Compliance Cooperative – of which Elliptic is also a member – which aims to promote high standards of regulatory compliance throughout the cryptocurrency cash industry.
These compliant Bitcoin ATM operators conduct Know Your Customer (KYC) checks on their users and can monitor their users’ transactions using blockchain analytics capabilities to identify illegal or high-risk activity, which they can then report to the police. Indeed, at Elliptic we have worked with regulated Bitcoin ATM providers to enable them to achieve compliance with AML/CFT requirements in the US and elsewhere.
Risks of financial crime
While there are undoubtedly responsible players in the crypto kiosk space, Bitcoin ATMs can be used for illegal activities such as money laundering and fraud. This is true when Bitcoin ATM operators fail or refuse to comply with regulatory requirements, as the FCA has suggested is the case in the UK.
In Elliptical 2022 “A Guide to Preventing Financial Crime in Cryptocurrencies”we have listed numerous typologies of financial crime involving Bitcoin ATMs. This may include:
Fraud
Bitcoin ATMs have been used in various forms of impersonation fraud, where victims are tricked into depositing cash at kiosks, converting the funds into cryptocurrency, which is then sent to a wallet belonging to the fraudsters. For example, scammers posed as tax collectors or utility company agents demanding payment through Bitcoin ATMs to settle debts.
The victim never sees their funds again after depositing them at the kiosk. The FBI has warned that Bitcoin ATMs have recently appeared in cases of hog slaughter, a fast-growing form of fraud that involves manipulating victims into transferring their money to fake investment platforms.
Payments for illegal or high-risk services
Bitcoin ATM users can deposit cash at kiosks and then use the cryptocurrency they receive to make purchases on illegal websites, such as dark web marketplaces or sites for buying and selling stolen credit card information. Where users are transferring cryptocurrencies from Bitcoin ATMs to covert services such as crypto mixers, this can also be an indicator of high-risk activity.
Drug trafficking
Bitcoin ATMs have been used in criminal activities that require a large amount of money, such as drug trafficking. In 2018, European law enforcement agencies uncovered a money laundering ring that used Bitcoin ATMs to convert cash from drug sales in Spain into Bitcoin, which was then transferred to drug cartel members in Colombia.
Human trafficking and sexual exploitation
Gangs involved in activities such as human trafficking related to prostitution have used Bitcoin ATMs as a way to convert cash into Bitcoin, which they can then launder. The Cryptocurrency Compliance Cooperative highlighted how Bitcoin ATMs can be abused by smuggling gangs to collect payments from their victims, especially around high-profile events like the Super Bowl.
Mule activity
Criminal networks may rely on money mules, often students or other vulnerable individuals, to deposit or withdraw cash for them from Bitcoin ATMs.
Our report also highlights a number of behavioral and transactional red flags associated with Bitcoin ATMs, including:
- Frequent use of Bitcoin ATMs located in high-risk locations, including areas associated with gang activity.
- Unusually high levels of transaction activity occurring through ATMs, such as hundreds of thousands or millions of dollars in turnover in a short period of time.
- Large denomination bills – such as $50, $100 or Euro bills – are used for frequent and constant fiat deposits to Bitcoin ATMs by the same users, without clear explanation.
- One individual making multiple fiat ATM deposits of cryptoassets each day up to a standard deposit limit – below $3,000, for example – or at frequent intervals for amounts consistent with “sniffing” activity.
- One person accesses multiple cryptoasset ATMs in different locations within a short period of time for inexplicable reasons.
- Accounts are opened by students or other young individuals. When questioned, some may imply that they have been targeted by job advertisements via social media platforms that offer a fee for ATM Bitcoin transfers. Affiliated job postings may pose as IT consulting firms or similar jobs.
Identifying risks
It is critical that public and private sector stakeholders can identify these and other risks associated with Bitcoin ATMs. Fortunately, blockchain analytics solutions – like those from Elliptic – make it possible to detect and disrupt illegal activities involving crypto kiosks.
First, regulated Bitcoin ATM operators can use blockchain analytics to identify high-risk transactions that could indicate illegal activity. For example, if a Bitcoin ATM user sends funds to mixing services or to crypto addresses associated with known fraud or scams, the operator can use that intelligence to block transactions, close suspicious accounts, or file a police report. With wallet and transaction verification solutions like those Elliptic offers, crypto kiosk operators can identify these red flag indicators.
Second, crypto exchanges and other services can use blockchain analytics to identify potential exposure to high-risk Bitcoin ATM services. If, when using crypto transaction screening software such as Elliptic Navigator, an exchange sees that one of its clients is engaged in receiving inexplicably large amounts of cryptocurrency from a Bitcoin ATM whose operator has not received regulatory approval, this may be a sign of increased risk. further investigation and due diligence.
Finally, law enforcement investigators can use blockchain analytics capabilities such as Elliptic Investigator to track the flow of funds related to the illicit use of Bitcoin ATMs, identifying risky wallets associated with high-risk kiosks.
Insight into these types of risks can be used to support action against high-risk and unregistered Bitcoin ATMs, including those that enable illegal activity. A February 2022 UK court case – Gidiplus Limited v FCA – stated that Elliptic’s insights “A Guide to Preventing Financial Crime in Cryptocurrencies” notified the FCA of its decision to refuse registration to Gidiplus, a Bitcoin ATM provider that the FCA found to be failing to apply sufficient AML/CFT controls.
The above image from Elliptic Investigator shows the funds being transferred from a Bitcoin ATM service for two dark web services used to buy and sell stolen credit card information: PinPays and Bitaps.
Bitcoin ATMs may present specific financial crime risks; but with access to the right solutions, these risks can be identified and investigated.
Contact us to learn more about how Elliptic’s blockchain analytics can help you address the risks associated with Bitcoin ATMs.
