In a bid to protect Vermonters from scammers, legislators recently passed what could become the state’s first-ever law regulating cryptocurrency kiosks, which allow people to quickly buy virtual currencies with cash or debit cards.
Among the provisions included in H.659 are a daily transaction limit, a fee cap on exchanges and a one-year moratorium on the installation of any new machines in the state, which would take effect at the end of June.
Although Gov. Phil Scott had not seen the bill’s final language yet, his spokesperson Jason Maulucci said “the Department of Financial Regulation has been comfortable” with its provisions.
The kiosks look like standard ATMs that allow consumers to connect to their banks from places like gas stations and bars, but are in fact very different. Instead, the machines sell “crypto”, the nickname for a vast array of digital currencies that do not rely on banks to verify transactions.
There are currently 36 approved kiosk locations in Vermont, with seven more pending regulatory approval, according to the Department of Financial Regulation.
After back and forth amendments between the two legislative chambers, the House passed the Senate’s version of the bill on April 25.
As of Monday morning, the governor had yet to receive the bill but expected it shortly, Maulucci said. Once in his hands, Scott would have five days to sign it, veto it or let it pass without his signature.
When the House first passed H.659 in January, it was a piece of routine housekeeping, an update to Vermont’s captive insurance laws. In the Senate Finance Committee, however, a new section appeared, titled “virtual currency kiosk operators,” which introduced restrictions on the machines to prevent their use by scammers.
Sen. Ann Cummings, D-Montpelier, who chairs the committee, said lawmakers worked closely with the Department of Financial Regulation to get the language right. The department has warned about crypto scams repeatedly in recent years.
“This is about protecting Vermonters’ savings,” Cummings said.
A vector for fraud
The difficulty in tracking both cryptocurrency and cash has made “Bitcoin ATMs” a powerful vector for fraud. If a scammer can convince a victim to trade in large sums of cash for cryptocurrency at one of these machines, there is no intermediary bank to freeze the transaction. Once the money is transferred away to the scammer’s virtual wallet, it is practically impossible to recover.
To shield Vermonters from losing too much money at once, lawmakers included a daily transaction limit of $1,000 in the bill.
“This is to slow down the speeds at which people are being victimized,” said Aaron Ferenc, deputy banking commissioner at the Department of Financial Regulation.
The legislation would also impose a 3% cap on the fees that kiosk operators can charge on each exchange.
In testimony to the House Commerce Committee, representatives from two kiosk operators in Vermont argued the regulation would effectively price them out of operating in the state.
“Sometimes, when you get to a very rural location, it’s more expensive to send the armed guard there to pick up the cash,” said Larry Lipka, senior vice president at CoinFlip, which operates three kiosks in Vermont. He pointed to California, where the fee limit is 15%, allowing companies to recoup more costs.
Mark Smalley, chief compliance officer for Bitcoin Depot, said the potential departure of kiosk operators would hurt small businesses. These companies pay rent for the space to hold their machines, typically to convenience stores or smoke shops.
Bitcoin Depot operates 23 staffed locations, which would not be subject to the new regulations, across Vermont. It also has three crypto kiosk registrations pending with the Department of Financial Regulation.
During more than an hour of testimony, lawmakers grilled the executives on whether their companies were doing enough to protect their clients from fraud.
A significant part of crypto kiosk users are, in CoinFlip’s own words, “underbanked and low-income individuals who want to transact primarily in cash,” leaving them especially exposed to losing their life savings if they fall prey to a scam.
Lipka said CoinFlip’s kiosk screens warn about scams and instruct users to call its 24/7 hotline if a third party has sent them there to make a transaction.
“In addition, CoinFlip permanently blacklists high-risk digital wallet addresses to prevent (them) from ever being used at a CoinFlip kiosk again,” he said.
When pressed by Rep. Kirk White, D/P-Bethel, on whether nefarious actors could easily create new wallets to avoid the blacklist, Lipka conceded they could.
“Business always says, ‘If you do this to us we will go broke,’” Cummings said when asked about the House testimony. “You have to look at the numbers and make the best decision you can.”
‘We’re not an ATM’
The biggest point of contention, however, surrounded the very nature of crypto kiosks and their relationship to traditional ATMs — which is short for “automated teller machine.”
“You know, we call them ATMs because that’s what they look like, and they make people comfortable,” Lipka said. “But we’re not an ATM. You’re not accessing your own cash. We’re selling you something that you buy voluntarily.”
Rep. Heather Chase, D-Chester, appeared stunned by his comments.
“You just said that you call them ATMs, not that they are, so that people are comfortable with that?” she asked.
“We have (called them ATMs) in the past,” Lipka said. “We prefer crypto kiosks … because that’s what it actually is. It’s not an ATM because it’s not connected to a bank.”
On its website, CoinFlip advertises itself as “a network of coast-to-coast bitcoin ATMs.” A picture of CoinFlip’s physical machine on the company’s landing page includes the words “Bitcoin ATM” written prominently below the touch screen.
However, the legislation could have been even more severe on the kiosk operators. The House amendment to H.659 would have banned all kiosks from operating for two years. The Senate reduced this to a yearlong moratorium on registering new machines.
“We have people who have put their money into the kiosks, so there was a concern they wouldn’t be able to access their savings,” Cummings said.
If the bill were to become law, the commissioner of financial regulation would have to report to lawmakers by January 2025 on whether the legislation is doing enough to protect Vermonters.
Cummings said the novelty of cryptocurrency meant it took a while for lawmakers to get their heads around it.
“This is a whole new world,” Cummings said. “We probably won’t get it right the first time.”
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