The ABCs of bitcoin ATM regulation and compliance in the US – ATM Marketplace

If you are planning to operate a bitcoin ATM business in the U.S. where 60% of the world's bitcoin ATMs are located there's a lot more to consider than simply buying a kiosk from General Bytes, Genesis Coin or Lamassu. You need to stay compliant, both on the federal level and the state level.

However, the cost and the work involved in compliance may be more than some bitcoin ATM operators bargain for, especially if they are only operating one or two kiosks, so it pays to do your homework. What follows is a rundown on the basics, but you may want to set up your business first, according to one lawyer.

"We recommend that you form a corporation or an LLC and have the nuts and bolts of operating as a business down before you start talking about the specifics of bitcoin ATM regulations," Bill Repasky, a lawyer with Frost Brown Todd, a Louisville, Kentucky, law firm that provides legal counsel for bitcoin ATM operators, told ATM Marketplace in an interview.

When you are ready to roll, the federal level of regulations most directly applicable to bitcoin kiosk operators are spelled out in the Bank Secrecy Act, or BSA for short, a law requiring financial institutions to assist U.S. government agencies in detecting and preventing money laundering.

According to theFinancial Crimes Enforcement Network, the government agency tasked with interpreting the BSA, the definition of a financial institutionfits traditional banks, but alsoincludes several subcategories, including one known as a money-services business, or MSB.

A bitcoin ATM operator is considered an MSB, and all MSBs have to register with FinCEN. You won't need a lawyer for this part, said Repasky.It only takes about 20-30 minutes to fill out FinCEN form 107online. Just remember, you have to register within 180 days of establishing an MSB and renew every two years.

Once you register with FinCEN, you are obligated tocomply with the BSA. Among other things, that requires a bitcoin ATM operator to establish an anti-money laundering compliance program, which is a written document that explains your overall plan to thwart money laundering and the financing of terrorist activities.

As part of your AML compliance program, you need to appoint a dedicated AML compliance officer,the principal figure responsible for overseeing the effective development and implementation of you firm's AML program. You also have to maintain superior reporting and record-keeping capabilities to ensure that you are collecting the appropriate information for all transactions and filing the proper reports.

An integral part of any AML program is knowing who your customer is. Know-your-customer is the business process of identifying and verifying the identity of customers, so you can spot risky ones and prevent fraudulent transactions before they start.

In terms of reporting, BSA requires you to monitor customer transactions and file a currency transaction report for any transaction (daily aggregate amount)over $10,000. You also needto file a suspicious activity report for any transaction that might signify money laundering, tax evasion or other criminal activities.

"A suspicious activity could be something in the nature of structuring transactions at a bitcoin ATM that appear designed to evade the $10,000 CTR limit, or It could be a customer providing information that indicates that they are a person of interest to the U.S. government," Repasky explained.

Additionally, the Office of ForeignAssets Control, or OFAC,keeps a database of individuals acting for or on behalf of targeted countries. Included in your AML compliance report, you also need to outline how you are monitoring that list.

Your AML compliance program should also includehow you plan to train and retrain your staff on BSA/AML rules and procedures. Putting together a compliance program is a big job, one that will likely requirehire outside help.

"Typically a bitcoin ATM operator will work with an outside consultant or a lawyer to create the BSA compliance program,"Repasky said."Then they will begin contracting with vendors who can provide the necessary services to comply with the BSA programs, such as collecting information and running it throughthe OFAC list."

FinCEN governs BSA protocol and enforcement. However, various other agencies that are all part of the FinCEN operation have been assigned specific duties for enforcing compliance with the BSA, and for MSBs, the primary investigative authority is the IRS.In fact, the IRS has already made it clear that it is monitoring bitcoin ATM activity and looking into compliance.

"If you're a bitcoin ATM operator and someone is going to randomly select you for an audit, it is most certainly going to be the IRS," Repasky said."What we're seeing now is that the first round of IRS subpoenas have gone out to the bitcoin ATM operators asking for compliance documentation. They went out beginning in the spring and through the summer. They are requesting a boatload of information from the bitcoin ATM operators regarding their BSA programs."

Repasky believes that collecting that informationwill be an eye-opening experience for both bitcoin ATM operators and the IRS. Bitcoin ATM operators simply are not set up the same way as banks. They don't have the same resources, staff and record keeping abilities as large financial institutions, so keeping up with record keeping couldpose a challenge.

"Often the smaller bitcoin ATM operators don't collect it, don't have the capacity to collect it, don't retain it and they will be in trouble, honestly," he said.

In every state that a bitcoin ATM operator conducts business, they need to look at the laws for acquiring a money transmitter license those laws varyfrom jurisdiction to jurisdiction, and are often in flux. Regardless, it's critical to maintain compliance.

"If you run an ATM in a state that requires a license, even if you do everything else correctly, but you don't have that license, it is a punishable, imprisonable federal offense," Repasky warned.

Some states have strict licensing requirements. New York, for instance, requires licensing for virtual currency through its BitLicense, created by the New York State Department of Financial Services. Other states have taken the initiative either through statute or regulatory interpretation to say that the act of transmitting money doesn't affect virtual currencies. And some have a blended program.

In Texas, for example, if you have a bitcoin ATM that is a standalone device, you probably do not need to have a Texas money transmitter license. But if your bitcoin ATM in Texas is connected to a virtual currency exchange then Texas requires a money transfer license.

"If you have to be licensed in your jurisdiction, then you need to look at what is required to be licensed. And that can be onerous from a financial and a compliance standpoint," Repasky said. "In some cases, it is actually the make-or-break decision on whether a bitcoin operator will operate in that state."

Obtainingstate license can take several months.In most cases, you will have to post a surety bond, whichis required so that, in the event the licensed money transmitter stops operating, there ismoney to cover any transactions that have not yet cleared.

The costs of staying compliant can add up quick. "Plan in advance before you drink one too many beers or wines and buy your kiosk and then suddenly, begin to see how much it's going to cost," Repasky said. "It's like what my wife always says about free pets: there's no such thing."

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The ABCs of bitcoin ATM regulation and compliance in the US - ATM Marketplace

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