KC Fed tracks healthy growth of crypto ATM industry despite predatory operators

The crypto ATM industry gets little attention relative to its size and issues. It appeals to users with motivations ranging from convenience to investment.

The crypto ATM business is thriving in the United States, despite criticism for illegal or predatory behavior, according to a report released by the Federal Reserve Bank of Kansas City. Crypto ATMs have a growing customer base that could sometimes benefit from better education about crypto, the report concluded.

Crypto ATMs convert Bitcoin (BTC) and often other cryptocurrencies or stablecoins into or out of fiat. Like traditional ATMs, crypto ATMs are usually placed in high-traffic locations and charge a fee for their service. That fee is one of the sources of controversy about crypto ATMs, Kansas City Fed lead payments specialist Franklin Noll wrote in the report. The average fee to use a crypto ATM is 15-16%, and operators may set an unfavorable conversion rate, effectively driving fees up to 20% in many cases.

The report identified four user groups for crypto ATMs. Some were cash users who may be unbanked, possibly by preference. Older people who found ATM technology more familiar than that of crypto exchanges made up another segment. Some users were motivated by the convenience of using an ATM, and others found ATMs provide greater relative anonymity.

Related: UK FCA shuts down 26 crypto ATMs following coordinated investigation

Crypto ATMs require identification (“such as a phone number,” the report stated). Crypto ATMs are money-servicing businesses, so they are subject to state and federal regulation, including Anti-Money Laundering. This can be a major source of overhead costs for the operators, although regulatory compliance is sometimes low in the industry, the report stated.

Minority groups and immigrants make up a significant user group for the ATMs. Immigrants tend to buy crypto through ATMs to use in person-to-person transactions such as remittances:

“One explanation for this usage may be that the cost of using cryptocurrency obtained from a BTM [Bitcoin ATM] in a remittance may be comparable to the cost of sending a remittance via third parties using cash, when factoring in convenience, time savings, and transactional certainty and speed.”

The crypto ATM industry is often accused of predatory inclusion, that is, “disguising high-risk, high-cost services as ways for the financially disadvantaged to gain entry to lucrative financial investments.” It added, “[T]he losses to uneducated crypto investors using BTMs to purchase volatile cryptocurrencies could be substantial.”

Bitcoin ATMs, which convert cash to cryptocurrency, have garnered criticism for their association with illegal or financially predatory behaviors. Some consumers are using them anyway. https://t.co/gIBEHcCjPW#PSRbriefing pic.twitter.com/OiMmfmj5LX

— Kansas City Fed (@KansasCityFed) August 30, 2023

The report also cited Chainalysis data showing that victims of scams moved $345 million through crypto ATMs in 2022. “The industry’s role in facilitating money laundering and scams may pose significant risks to the public,” the report concluded.

Industry statistics are rare and unreliable, but it is clearly growing after a COVID-related industry downturn, according to the report. Operator Bitcoin Depot went public in July and saw a significant revenue jump.

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