You Can Use a Bitcoin ATM to Launder Money, But Why Would You?
12.14.2018

A new in-depth report from Bloomberg has found that many U.S. operators of bitcoin ATMs—machines that allow the quick conversion of cash to bitcoin—are lax in their enforcement of identity controls, possibly putting them in violation of U.S. banking and anti-money laundering (AML) regulations.

The report was produced in close collaboration with Arnold Spencer, a former federal prosecutor who now works for Coinsource, a major bitcoin ATM operator. Coinsource and Spencer are aiming to highlight competitors’ lax practices to improve their own market position—but that doesn’t invalidate what they’ve uncovered. Spencer has demonstrated that many bitcoin ATMs (which Bloomberg refers to throughout as “BTMs”) allow users to provide fake credentials and otherwise circumvent identity controls. In one instance, Spencer successfully purchased bitcoin in Plano, Texas using a fake driver’s license bearing Frank Sinatra’s name and photo.

The use of fake IDs also allowed Spencer to avoid activating AML laws requiring that cash transactions totaling more than $10,000 per day be reported to the Treasury Department. Further, many BTM operators are small startups with loose business practices: One operator, New York’s Cottonwood, claims that its business and customer records have gone missing from the company’s office in a WeWork.

As reactions from the cryptosphere have been quick to point out, the report doesn’t address one objection to its core premise: Bitcoin isn’t necessarily a great way to launder money, because law enforcement officials have increasingly sophisticated tools for connecting publicly-viewable records of blockchain transactions and wallets to real-world identities. Bloomberg refers to bitcoin as a “more or less untraceable asset,” an incomplete and arguably inaccurate claim.

Moreover, the bitcoin ATMs Bloomberg is focused on often have built-in cameras, and are often in locations, such as convenience stores, with their own security cameras. Those records could be used to connect a particular bitcoin withdrawal to an individual, even if they circumvented identity controls by using fake credentials.

Spencer has, however, demonstrated that it’s not hard to avoid those cameras. And bitcoin’s theoretical traceability doesn’t dispel strong evidence that bitocin ATMs are being used by criminals. Bloomberg cites international law enforcement statements that bitcoin is often used by “low-level drug dealers.” The report also details the heavy use of certain bitcoin ATMs in high-crime areas, including in one of Detroit’s poorest and most high-crime neighborhoods. One such machine, in an area with a 42 percent real estate vacancy rate, accepted $808,000 in cash revenue in a six-month span in 2016, generating $120,000 in profit for its operator. Those numbers suggest demand far outstripping what you might expect of the working-poor population of the area, possibly implying illicit use.

But Bloomberg doesn’t do much to explain why bitcoin ATMs would appeal to criminals who already have the preferred global medium of illicit exchange—cash. While depositing large amounts of cash in a bank would be certain to invite law enforcement scrutiny, Europol describes transportation of cash by freight or mail as a “blind spot” for law enforcement, and criminals have proven extremely effective in using front businesses and other means to turn cash into bankable “clean” money. Past estimates have found that nearly 3 percent of global GDP, or roughly $2.5 trillion dollars, is laundered each year. The entire value of every cryptocurrency in existence peaked at around $830 billion in January of 2018, and has since dropped to barely over $100 billion.

In the absence of clearer evidence, we can only speculate that bitcoin ATMs provide an (imperfect) means for small-time operators to make their physical cash more convenient and secure, for instance for paying suppliers. They may also be using bitcoin as an onramp to more genuinely private currencies like Monero. It also seems plausible that many small-time criminals simply still believe, mistakenly, that bitcoin itself is untraceable. For now, that might be effectively true: According to Bloomberg, law enforcement hasn’t payed much attention to bitcoin ATM transactions. But that’s a failure of police, not bitcoin.