Lawmakers send new Bitcoin ATM regulation to Governor Phil Scott’s desk

A man enters his phone number into a blue and orange kiosk.
A man uses a bitcoin kiosk. Stock photo via Pexels

In an effort to protect Vermonters from scammers, lawmakers recently passed what could become the first-ever state law to regulate cryptocurrency kiosks, which allow people to quickly purchase virtual currencies using cash or debit cards.

A person holds a coin with the letter B in front of an orange machine.
A person holds physical Bitcoin in front of a kiosk. Photo: BTC Keychain via Flickr

The provisions included in H.659 include a daily transaction limit, a cap on exchange fees and a one-year moratorium on the installation of new machines in the country, which will come into force at the end of June.

Although Gov. Phil Scott has not yet seen the final version of the bill, his spokesman Jason Maulucci said the “Department of Financial Regulation is comfortable” with its provisions.

Kiosks look like standard ATMs that allow consumers to connect to their banks from places like gas stations and bars, but they are actually very different. Instead, the machines sell “crypto,” a nickname for a wide range of digital currencies that do not rely on banks to verify transactions.

According to the Department of Financial Regulation, there are currently 36 approved kiosk locations in Vermont, with seven more pending regulatory approval.

After amendments by both legislative chambers, the House adopted the version of the bill presented by the Senate on April 25.

Maulucci said the governor had not yet received the bill as of Monday morning but expected it soon. Once the bill lands, Scott will have five days to sign it, veto it or leave it unsigned.

When the House first passed H.659 in January, it was part of routine housekeeping, an update to Vermont’s captive insurance law. However, a new section titled “Virtual Currency Kiosk Operators” has appeared in the Senate Finance Committee, which has introduced restrictions on the machines to prevent them from being used by fraudsters.

Sen. Ann Cummings, D-Montpelier, who chairs the committee, said lawmakers worked closely with the Department of Financial Regulation to improve the language. The department has repeatedly warned about cryptocurrency scams in recent years.

“This is about protecting the savings of Vermonters,” Cummings said.

Fraud vector

The difficulty of tracking both cryptocurrency and cash has made “Bitcoin ATMs” a powerful fraud vector. If a fraudster manages to convince a victim to exchange large sums of cash for cryptocurrency at one of these machines, there is no intermediary bank that can freeze the transaction. Once money is transferred to a fraudster’s virtual wallet, it is virtually impossible to get it back.

To protect Vermonters from losing too much money at once, lawmakers included a $1,000 daily transaction limit in the bill.

“This is intended to slow down the rate at which people become victims,” said Aaron Ferenc, deputy commissioner for banking at the Department of Financial Regulation.

The legislation would also impose a 3% cap on the fees kiosk operators can charge at each exchange.

In testimony before the House Commerce Committee, representatives of two Vermont kiosk operators argued that the regulation would effectively eliminate them from operating in the state.

“Sometimes when you go to a very rural location, it’s more expensive to send an armed guard there to get cash,” said Larry Lipka, senior vice president of CoinFlip, which operates three kiosks in Vermont. He pointed to California, where the fee cap is 15%, which allows companies to recoup more costs.

Mark Smalley, chief compliance officer at Bitcoin Depot, said the potential departure of kiosk operators would hurt small businesses. These companies pay rent for space to store their machines, usually in convenience stores or smokehouses.

Bitcoin Depot operates 23 staffed locations, which will not be subject to the new regulations, throughout the state of Vermont. It also has three cryptocurrency kiosk registrations pending with the Department of Financial Regulation.

A man in a suit speaks on a podium using microphones from NBC5 and Wgan.
Governor Phil Scott responds during his weekly news conference at the Statehouse in Montpelier on Wednesday, April 3, 2024. Photo: Glenn Russell/VTDigger

During more than hours of testimony, lawmakers grilled executives about whether their companies were doing enough to protect their customers from fraud.

A significant portion of cryptocurrency kiosk users are, in CoinFlip’s words, “underbanked and low-income people who want to transact mainly in cash,” which puts them at particular risk of losing their entire life savings if they fall victim to fraud.

Lipka said CoinFlip kiosk screens warn about fraud and instruct users to call the 24-hour hotline if a third party has sent them there to make a transaction.

“In addition, CoinFlip is permanently blacklisting high-risk digital wallet addresses to prevent their reuse on a CoinFlip kiosk,” he said.

Pressed by Rep. Kirk White, D/P-Bethel, on whether nefarious actors could easily create new wallets to avoid the blacklist, Lipka admitted they could.

“Business always says, ‘If you do this to us, we’ll go bankrupt,’” Cummings said when asked about the House testimony. “You have to look at the numbers and make the best decision you can.”

“We are not an ATM”

The biggest point of contention, however, concerned the very nature of cryptocurrency kiosks and their relationship to traditional ATMs – which is short for “automated teller machine”.

“You know, we call them ATMs because they look like that and they provide convenience for people,” Lipka said. “But we are not an ATM. You don’t have access to your own cash. We are selling you something that you buy voluntarily.”

Rep. Heather Chase, R-West Chester, seemed stunned by his comments.

“Did you just say you call them ATMs, not that you call them that to make people feel comfortable with it?” she asked.

“We had (called them ATMs) in the past,” Lipka said. “We prefer cryptocurrency kiosks… because that’s what it really is. It’s not an ATM because it’s not connected to a bank.”

On its website, CoinFlip bills itself as a “coast-to-coast Bitcoin ATM network.” A photo of a physical CoinFlip machine on the company’s landing page shows the words “Bitcoin ATM” written prominently below the touchscreen.

However, the regulations could have been even stricter for kiosk operators. The House amendment to H.659 would ban all kiosks for two years. The Senate limited it to a one-year moratorium on the registration of new machines.

“We have people who have been depositing money at the kiosks, so there was concern that they wouldn’t be able to access their savings,” Cummings said.

A woman with glasses talks to a group of people.
Senator Ann Cummings of Washington State, chairwoman of the Senate Finance Committee, speaks at the Statehouse in Montpelier on Tuesday, January 30, 2024. Photo: Glenn Russell/VTDigger

If the bill were to become law, the commissioner of financial regulation would have to report to lawmakers by January 2025 on whether the law adequately protects Vermonters.

Cummings said the newness of cryptocurrency meant it took some time for lawmakers to get around to it.

“It’s a whole new world,” Cummings said. “We probably won’t get it right the first time.”