What is a bitcoin ATM? What consumers should know

June 8, 2020

There are over 2,000 Bitcoin ATMs in the United States alone. If you’re curious about investing in cryptocurrency, one of these machines might be the easiest way to make a purchase.

But how do you use them, and most importantly, how do you know if they’re safe?

Thinking about finally getting into bitcoin? You’re not alone, and if you made it here, it’s probably because you still have some questions both about how it all works and how to make sure you don’t get ripped off.

After all, there is no shortage of headlines pointing to fraud, bitcoin money laundering, and other forms of financial crime in the cryptocurrency space. Still, consumer interest in bitcoin and other cryptocurrencies continues to increase. So it’s understandable that if you’re interested in crypto, you have some concerns you need clearing up first.

Good news! You’ve come to the right place.

As a bitcoin compliance AML consulting firm, BitAML works with entrepreneurs in the cryptocurrency market, including bitcoin kiosk operators. What we focus on is helping businesses meet regulatory compliance requirements.

Why does this matter to you, the consumer?

Because regulatory compliance is about consumer protection.

You don’t need to understand the finer points of regulatory compliance to buy bitcoin for the first time. But businesses that have robust AML (that’s “anti-money laundering”) protocols in place are businesses you should feel confident transacting with.

Those businesses that don’t emphasize AML compliance? They are not only potentially operating illegally, they might be unwittingly setting you up for trouble down the line. We’ll explain.

In this blog post we’ll cover:

  • What bitcoin ATMs are
  • How bitcoin ATMs work
  • Tips for wallet safety
  • Whether bitcoin ATMs are safe
  • Where to find bitcoin ATMs

Let’s dive right in.

What is a bitcoin ATM?

Bitcoin ATMs are stationary, physical kiosks that allow walk-up customers to exchange paper (or “fiat”) currency like a U.S. dollar for its equivalent in bitcoin or another cryptocurrency. Much like an ATM for your personal bank, these machines are located in various brick-and-mortar locations like shopping malls and gas stations.

Some kiosks also enable you to sell cryptocurrency to the kiosk in exchange for fiat currency, which is then dispensed. This kind of ATM is often referred to as a “bidirectional” ATM. Those that only sell cryptocurrency are called “unidirectional.”

Many ATMs also offer more cryptocurrencies than bitcoin; these so-called “altcoins” like Ethereum, Litecoin, or DASH, may also be offered.

We should also note that there is no such thing as a physical bitcoin, or other cryptocurrency token. You may have seen images online like the one below, showing a literal, physical coin with the bitcoin logo on it.


Shutterstock

This is just a novelty item and has no inherent worth, so if you ever run into someone online trying to sell you one of these for $8,000, they’re trying to rip you off.

However, the piece of paper behind that coin is actually important. That is a private key that is connected to your bitcoin wallet, where your actual (albeit digital) tokens are stored.

These “paper wallets” must be kept private, or else your tokens will be at risk. BTMs may offer disposable keys that look like this as well. Those are safe to throw away. We’ll get into more detail on wallets in the next section.

The main difference between a bank ATM and a cryptocurrency ATM is that the latter only enables you to execute an exchange of cash for cryptocurrency. Unlike a bank ATM, a bitcoin ATM doesn’t offer banking services like withdrawal or transfers.

These machines solely execute transactions of fiat cash for a cryptocurrency, or vice versa in the case of a bidirectional machine. They may also accept debit cards in addition to cash, depending on the model.

Bitcoin ATMs are also sometimes called “BTMs” or “crypto kiosks.”

Now, how do you use one?

How do I use a bitcoin ATM?

Depending on your purchase intent (buying or selling tokens) and the degree to which the bitcoin ATM operator takes AML compliance seriously (we’ll get into that later), your experience purchasing bitcoin from a BTM might vary.

But for the most part, a transaction is fairly straightforward.

Take a look at this video below. It offers a good overview of how a basic transaction takes place.

Careful, though! There are some no-no’s related to compliance suggested in this video. We’ll touch on those momentarily.

Most transactions are really that simple. You find a bitcoin ATM in the wild somewhere, approach it, and some version of the following steps take place:

  1. You follow the on-screen prompts to either buy or sell tokens
  2. You’re asked to scan your wallet QR code (either paper or on your phone or device)
  3. You insert payment method if you’re buying
  4. You get a receipt.

There may be other steps in the mix here, but we’ll get into those details in the next section.

It’s also a good idea to check your digital wallet to make sure that the transaction has taken place by matching your transaction ID on your receipt to your transaction activity in your wallet app. A transaction should happen relatively quickly, but it can take up to several hours in some cases.

Note that when using bitcoin and other cryptocurrencies, there is no recourse for you if you lose your paper wallet or private key, and there is no way to “get money back” for tokens that are lost or stolen. It’s of utmost importance to guard your wallet.

Okay, what kind of wallet should I get?

When selecting a wallet, it’s important to look at the features a wallet vendor offers, and to do some due diligence on the safety and security of the vendor.

If they have hundreds of negative reviews from angry consumers who have lost tokens, or major headlines at outlets like CoinTelegraph or coindesk about security problems, then you might want to proceed with caution.

Another tip for wallets: unless you’re doing a lot of active trading each day, you should look to store your purchased crypto in something called a “cold storage” wallet. The security around cold wallets is an order of magnitude better than that of “hot” wallets, though a hot wallet does have benefits in terms of instant access to your tokens.

It’s all a matter of what your goals with cryptocurrency are. If you’re simply looking to invest casually and build up a store of crypto over time, then purchasing and storing in a cold wallet makes sense.

If cryptocurrency is much more central to your lifestyle or career, and you’re performing multiple transactions daily on a big exchange, then it probably makes sense to have multiple wallets, some hot and some cold.

In any case, you’re probably better off when starting out just looking at cold wallet options that maximize security.

Now let’s look at how to tell whether the ATM you’ve selected is safe to use.

Are bitcoin ATMs safe?

All bitcoin ATMs are safe to use, provided they follow the same process of scanning your QR wallet code, accepting payment, and then sending the tokens to your wallet. This is because of the underlying technology that supports bitcoin and other cryptocurrencies: the blockchain.

When you process a transaction, the machine is logging it in real-time on the blockchain, a decentralized ledger of every transaction that takes place. By design, the blockchain is virtually impossible to hack, fake, or otherwise tamper with.

It’s highly unlikely that a third-party brick-and-mortar store would host a fake bitcoin ATM that just steals personal information or money. You’re more likely to become a victim of fraud or a hack purchasing tokens online at an exchange, or from another crypto user in a process called P2P (peer-to-peer) trading.


Shutterstock

Depending on the machine you use, you might be asked questions about your personal information, or be presented transaction fee structures that raise questions and doubts.

It’s important to note that these are not only normal, they are more than likely examples of a company’s AML protocols, designed to protect the business itself and the wider cryptocurrency marketplace from financial criminals.

Let’s talk about each in more detail.

Transaction fee disclosures

You should be transparently presented with transaction fees in the terms of service or similar disclosure that you must opt into before completing your purchase. These fees can run as high as 16% according to some reports, whereas online exchanges offer at-home or mobile trading at much lower rates.

Still, like we stated above, the exchanges might not be the surest route when you’re just starting out. The bitcoin ATM operators theoretically perform a middle-man service that provides the consumer with more security.

These are important tradeoffs for you to consider, but the key point here is that no disclosure of transaction fees should be a red flag that makes you reconsider doing business with that particular BTM vendor (unless the fees are just too high for your tolerance).

AML compliance, KYC data collection

We mentioned that the video above has some compliance no-no’s that we’d talk about.

The first is the title card around 0:20 that says “how to buy bitcoin without an ID.” The second comes around the two-minute mark when it advises viewers to use prepaid phones if asked for their phone number.

Why would you be asked for your ID and phone number?

Both ID and phone number collection are part of an AML compliance procedure called Know Your Customer/Customer Due Diligence (or KYC/CDD) which helps financial institutions to know their customers and their financial dealings so that they’re not unwittingly providing financial criminals and terrorists access to the financial sector.

TL;DR, KYC/CDD is data collection for the purposes of ensuring that you’re not using banks to fund terrorism, a drug operation, or some other criminal enterprise.

Think about when you go to your bank. They’ll typically ask for your ID and may even ask further questions depending on the nature of the deposit or withdrawal you’re making.

This is KYC/CDD in action.

Bitcoin ATMs, which are also considered financial institutions like banks according to the law, are required to follow the same rules and develop KYC/CDD protocols for their business models.

What KYC information will be collected?

You’ll most likely be asked for at least your ID and phone number so that the bitcoin ATM compliance software can perform a criminal watchlist search for you and ensure that the ID actually belongs to you.

Depending on what city and state you’re located in, and the size of your transaction, more information may be required.

If your transaction is highly unusual, or you pop up on some watchlist search, then a phone interview, or another form of Enhanced Due Diligence may be required.

If you fail to pass all of these checkpoints, your transaction will be aborted and you will likely be blocked from using the bitcoin ATM again.

If you attempt to subvert any of these steps, an institution may file a Suspicious Activity Report (SAR) with a federal financial watchdog called FinCEN. If you show up on enough SARs, you may become the subject of investigation.

This is why the advice to use a burner phone or any suggestion to subvert ID collection, at least in the United States, is just patently bad advice. If you’re not a financial criminal, you’re just shooting yourself in the foot.

What’s the bottom line?

Most people will do just fine passing a KYC check at a bitcoin ATM the same as they would at their own bank branch.

The important thing for consumers to know is that asking for your ID, phone number, or other information is the legal obligation of the financial institution you’re purchasing tokens from, and perfectly innocent.

Though we’re not saying that bitcoin ATM operators that don’t ask for this information are up to no good, they are possibly operating illegally. You will run into KYC at some point in your crypto journey, so getting used to shirking or subverting these requirements is not going to serve you well long-term.

Even aborting a transaction when asked for ID can be considered suspicious behavior, so tread lightly.

Where can I find bitcoin ATMs?

The bitcoin ATM market is growing rapidly, but they’re not so widespread you can find one at your local Walgreens just yet. They are in most major cities in most states, and there are many services which can help you find one nearest to you.

We recommend using coinatmradar. Not only does this service tell you whether the bitcoin ATM near you is unidirectional or bidirectional, it also lists the altcoins offered by the ATM, if any, as well as other data like transaction fees.

Ultimately, the best place to buy bitcoin depends on your needs and experience level, but your comfort and trust in doing so at all are hopefully assuaged after reading this post.

If you have any other questions about bitcoin, cryptocurrency, or compliance, please let us know! We’d love to provide more guidance and education on this topic for the public, so please reach out at info@bitaml.com with your questions and feedback.

If you’re a bitcoin ATM operator or interested in becoming an entrepreneur in the cryptocurrency industry, we suggest going through our blog archives to familiarize yourself with compliance topics, or reaching out to us with any questions you have here.

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