Bitcoin ATM: a criminal's laundromat for cleaning money.

• Author: Hyman, Mitchell
• Position: Automated teller machines

1. INTRODUCTION

   Bitcoin and other "virtual currencies" are becoming more popular with each passing day. (2) Most recently, Bitcoin Automated Teller Machines ("Bitcoin ATM") have been gaining publicity as the machines become more popular with Bitcoin users. (3) Prior to the advent of the Bitcoin ATM, Bitcoin already had an increased potential for money laundering because the area in which it operates is semi self-regulated. (4) With the addition of Bitcoin ATMs, there is an even higher risk of money laundering because users can exchange cash for Bitcoins and, in some cases, vice versa via the Bitcoin ATM. (5) For example, Drug Dealer Dan, who just completed a cash for drugs transaction, takes his "hard earned" cash and deposits it into a Bitcoin ATM. (6) Once the cash is deposited, the Bitcoin ATM exchanges the cash for Bitcoins at the going rate. (7) With little to no personal information necessary for the exchange, Drug Dealer Dan is now free to purchase items using his Bitcoin Wallet or exchange the Bitcoins for cash at another Bitcoin ATM. (8) Voila! His "dirty" cash has been cleaned. (9)

   This comment discusses how solely applying current Bank Secrecy Act (10) ("BSA") and Department of Treasury Financial Crime Enforcement Network (11) ("FinCEN") regulations to virtual currency--specifically Bitcoin ATMs--will put a strain on Bitcoin ATM owners and the industry, but will not reduce the risk of money laundering. (12) Part II of this comment discusses the characteristics of Bitcoin, explains the environment in which it exists, and how individuals use Bitcoin. (13) In Part III, this comment discusses how BSA regulations apply to virtual currency. (14) Additionally, Part III analyzes how Bitcoin ATM owners and operators would be classified under FinCEN's 2013 guidance. (15) Part IV shifts focus to the potential BSA requirements for Bitcoin ATM owners and operators, and discusses the potential for criminal and civil sanctions for disregarding BSA regulations. (16) Lastly, Part V discusses how the current identification requirements under the BSA are not conducive for Bitcoin ATMs to properly identify their customers. (17) Part V additionally suggests FinCEN implement regulations that will create a balance between the need to identify customers and Bitcoin's focus of anonymity. (18) The focus of the suggested regulation is to equip Bitcoin ATMs with (1) a passport or government issued identification ("ID") scanner; (2) software that matches the information gathered from the ID with state and national databases; (3) a camera that takes a picture of the Bitcoin ATM user in real-time (19); and (4) facial recognition software that matches the scanned ID with the picture taken in real-time and with the picture on file with the issuing authority. (20) This proposed regulation would make it easier to fight money laundering at Bitcoin ATMs while balancing the privacy concerns held by Bitcoin users. (21)

2. BACKGROUND

   In 2008, the concept of Bitcoin--"a peer-to-peer electronic cash system"--was originally proposed on the Cryptography Mailing List by someone named Satoshi Nakamoto. (22) Nakamoto's true identity is somewhat of a folklore among the various sectors of the computer industry. (23) Although no one may know the true identity of the creator of Bitcoin, one thing is certain--Bitcoin and other virtual currencies are becoming more popular. (24)

   Even with its increased popularity, most people still have no idea what a Bitcoin is or how it works. (25) In March 2013, FinCEN issued a guidance which defined "virtual" currency as "a medium of exchange that operates like [real] currency (26) in some environments, but ... does not have legal tender status in any jurisdiction." (27) As a virtual currency, Bitcoin is decentralized and is based solely on the Internet. (28) Because Bitcoin is decentralized, it is not backed by any country's government and no single individual controls it. (29) Furthermore, every transaction (or exchange)-whether it be "mined" (30) Bitcoins, individuals and businesses using them to purchase goods and services, or exchanges for investment purposes--is recorded and confirmed (31) in an online public ledger ("Blockchain" or "General Ledger") which is available for the world to see. (32) What puzzles people even more is that Bitcoin is not backed by any precious metals, such as gold or silver. (33) Rather, Bitcoin derives its value--much like currencies of the world today--from trust and use of the virtual currency. (34) Rather than a government policy stating it is willing to accept fiat money (35) (in this case Bitcoin) as legal tender, it is people around the globe who are willing to accept payment in Bitcoins that gives Bitcoin its value. (36) In other words, supply and demand control the value of Bitcoin. (37) As of November 24, 2014, the value of one Bitcoin was approximately $378.02. (38)

   1. STORING AND OBTAINING BITCOINS

   In order for Drug Dealer Dan to "clean" his cash using a Bitcoin ATM, the first step he (or anyone looking to use Bitcoins) must take is to create a Bitcoin Wallet. (39) A Bitcoin Wallet must be created to store the Bitcoins that will eventually be accumulated. (40) In most cases, a Bitcoin Wallet is a computer software program that allows Bitcoins to be stored. (41) Depending on the user's preference, a Bitcoin Wallet can be kept via a mobile device, a desktop computer, or on the web. (42) Moreover, users may opt for a paper wallet or an actual minted coin; however, these forms of storage are not used very often. (43)

   Bitcoin Wallets are very easily created and in most cases require almost no personal information. (44) For Example, Drug Dealer Dan can use an email address he recently created--obviously using a fake name--to create a Bitcoin Wallet. (45) If he chooses a Bitcoin Wallet that needs only an email address to create, then once he has done so, he can send and receive Bitcoins to his Bitcoin Wallet. (46)

   Once created, the Bitcoin Wallet is given two addresses--or "access keys": (1) a public key (47) (which also has a Quick-Response code (48) ("QR code")); and (2) a private key (49) that is only available to the individual who created the Bitcoin Wallet. (50) Once a Bitcoin Wallet has been set up, there are a few different ways to obtain Bitcoins: the typical user can either purchase them on a Bitcoin Exchange, collect them as payment for goods and services, or purchase them using cash at a Bitcoin ATM. (51)

   1. Bitcoin Exchanges and Consumer Transactions

      Bitcoin Exchanges52 allow users to buy and sell Bitcoins over the Exchange's website.53 On most Bitcoin Exchange websites, real currency is deposited into the user's account with the Bitcoin Exchange through the user's account at a traditional bank or by depositing cash directly into the Exchange's bank account. (54) Once the user has money in his or her Bitcoin Exchange account, the user is able to buy and sell Bitcoins. (55) Bitcoin Exchanges typically hold both parties' funds and once an order is placed (to either buy or sell Bitcoins), the Bitcoin Exchange website sends the respective amounts to each party's account. (56) Furthermore, the Bitcoin Exchange accounts are generally tied to a user's real account at a traditional bank. (57) Having the Bitcoin Exchange account linked to the user's actual bank account adds a layer of protection to help trace suspected criminal activity to an identifiable person. (58)

      Additionally, users can obtain Bitcoins by accepting them as payment for goods and services. (59) All that is necessary to receive Bitcoins as payment is the recipient's public Bitcoin address. (60) For instance, if Drug Dealer Dan decides he will only accept Bitcoins (as opposed to cash) in exchange for drugs, his customer will send the agreed amount of Bitcoins to Drug Dealer Dan's Bitcoin Wallet using his Wallet's public key. (61)

   2. The Bitcoin ATM

      The increased popularity of Bitcoin has led companies to find a way to make it easier for individuals--specifically the underbanked (62)--to buy and sell Bitcoins. (63) This led companies to create a Bitcoin ATM. (64) In addition to buying and selling Bitcoins at an online exchange website, individuals now have the option to buy and sell Bitcoin in person using only cash. (65) In some cases, almost no personal or banking information is needed to complete a Bitcoin ATM transaction. (66) Three companies together control a majority of the market for Bitcoin ATMs: Lamassu (67), Robocoin (68), and BitAccess. (69)

      Once an individual obtains Bitcoins in his or her Bitcoin Wallet, the user can make purchases, (online or in person) anywhere that accepts Bitcoin as a method of payment, or exchange them for cash at a Bitcoin ATM. (70) With Bitcoin's increasing popularity, more and more companies are accepting Bitcoins as a method of payment. (71)

3. ANALYZING FINCEN'S EXPLANATION OF BSA REQUIREMENTS AS IT APPLIES TO VIRTUAL CURRENCIES

   Due to Bitcoin's increased popularity and its potential for money laundering, FinCEN issued a March 2013 guidance on the application of FinCEN's regulations to virtual currencies titled "Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual Currencies." (72) The guidance was issued to help clarify the application of the BSA to virtual currencies. (73) Moreover, the guidance distinguishes between "real currency" and virtual currencies. (74) The guidance also classifies the different users of virtual currencies and explains which type of user would be considered a "money transmitter." (75) The classification of an individual or business is determined on a case-by-case basis. (76) Moreover, because the "definition of a money transmitter does not differentiate between [the transmission and acceptance of] real currencies and virtual currencies[,]" an owner of a Bitcoin ATM will likely be considered a "money transmitter" for purposes of FinCEN regulations. (77) However, there is some ambiguity...