GAO Report Indicates Tightening Regulations Coming on Crypto ATMs

Troutman Pepper

Troutman Pepper

In a January 10 report titled, “Virtual Currencies: Additional Information Could Improve Federal Agency Efforts to Counter Human and Drug Trafficking,” the Government Accountability Office (GAO) identified virtual currency kiosks as one reason driving an increase in the use of crypto payments to facilitate illegal activities, such as human and drug trafficking. According to the report, virtual currency kiosks are less regulated than crypto exchanges, and transactions are more difficult to trace. The GAO believes the Internal Revenue Service (IRS) and the Financial Crimes Enforcement Network (FinCEN) should do more to regulate crypto automated teller machines (ATMs), and its report indicates the agencies agreed with its two recommendations to tighten regulations of them.

The GAO’s report discusses how federal agencies — including the U.S. Postal Service (USPS), Immigration and Customs Enforcement (ICE), and the IRS — are countering the increase in crime they believe is facilitated by payments made using virtual currencies. It also noted that a lack of information about crypto kiosks, or crypto ATMs, hindered law enforcement’s ability to halt criminal activity.

The GAO’s central concern about crypto ATMs is that, although operators must register with FinCEN, they are not required to regularly update law enforcement about where the kiosk are located, which “limits federal agencies’ ability to identify kiosks in areas that have been designated as high risk for financial crimes.” In its view, increasing regulation of crypto kiosks will enable law enforcement to get improved information, allowing it to identify “potentially illicit transactions.”

To improve crypto kiosk regulation, the GAO recommended, and the IRS and FinCEN agreed, that the FinCEN director and the IRS commissioner should: (1) simultaneously review the money services business (MSB) registration requirements for crypto ATMs and other exchanges; and (2) create additional requirements for crypto kiosk operators to regularly update law enforcement on the physical addresses of the kiosks.

The GAO’s investigation determined that: (1) 36% of ICE’s crypto-related investigations involved drug trafficking; (2) 25% of the IRS’s crypto-related investigations were drug-related; and (3) 85% of the USPS’ crypto seizures involved drug trafficking. According to the GAO’s report, international criminal organizations are “increasingly using virtual currency because of its perceived anonymity and as a more efficient method to move money across international borders,” which allows money to move across borders without attracting the attention of law enforcement. The GAO attributed the increasing popularity of cryptocurrency money laundering to the less-regulated crypto ATMS, which allow for increased anonymity. “Money couriers deposit large volumes of cash from illegal drug proceeds into a kiosk to convert the value to virtual currency,” the report said. “Once the illicit proceeds are in this form, the funds can easily be transferred to another virtual currency user’s wallet, reducing the risk associated with transporting bulk currency.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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