Bitcoin ATMs Vending Operators Could Find New Calling In Emerging Crypto Economy

The lifeline for cash in an increasingly cashless world, ATMs are finding a new calling nowadays as digital currency terminals. Viewed in a historical context, ATMs could be jumping from one end of the currency spectrum (cash) to the other (cashless) as they help make digital currency available to consumers. Digital currency ATMs, while few in number, are emerging as a tool by which the nascent digital currency industry raises its visibility to the public at large. Led by bitcoin, the most pervasive digital currency, these evolving payment media, which face challenges, offer several advantages in an increasingly global economy.

Digital currency makes it possible to send and receive money anywhere in the world at any given time. Transaction fees are lower than other forms of payment. Payments can be made without personal information being exposed; the digital currency address is visible on a ledger, but it does not include personal information.

The government shutdown of the Silk Road drug marketplace and the Mt. Gox currency exchange meltdown, among other setbacks, have shaken what might have been a faster growth curve for digital currency. But this alternate type of money, also known as cryptocurrency or virtual currency, continues to expand with startups being announced almost daily for exchanges, wallets, mining (creation of digital currency units) and ATMs.

A recent poll on The Wall Street Journal's Money Beat blog found 83% of respondents said they believe there is a future for cryptocurrencies such as bitcoin.

Concerns about security are well founded, given the fact that bitcoin "wallets" and exchanges have been hacked. Digital currency, however, is an evolving technology and security features like multi-signature wallets are being introduced.

Most digital currency trading happens on the Internet. Hence, an Internet-connected ATM offers a convenient way to exchange hard cash for the virtual kind. Some ATMs are also capable of the reverse: converting digital currency into physical banknotes.

A person looking to convert their cash into digital currency scans their digital or paper wallet, inserts bills into the machine, and digital currency value is added to their wallet in the amount according to the exchange rate listed on the device. Some digital currency ATMs offer the option of buying currency using credit or debit cards.

Operators own and run digital currency ATMs in retail locations. But with these ATMs, the income opportunity can be greater than that of a traditional ATM. Where a traditional ATM operator earns a percentage on the sale, a digital currency ATM operator can also make money from digital arbitrage.

Profiting From Arbitrage

Because the value of digital currency changes rapidly, the price often varies from one currency exchange to the next. Hence, anyone buying and selling currency on a frequent basis has the opportunity to sell it at a higher price than they paid for it.

"We have money floating between the ATMs, banks and exchanges," said Eric Grill, chief executive of Coin Outlet Inc., a Burlington, NC-based bitcoin ATM manufacturer and operator. "[The float] allows us to take advantage of buying and selling on various exchanges, taking advantage of bid/ask spreads across exchanges. The more float and liquidity we have, the easier and the more often we can take advantage of these opportunities."

The bitcoin price can vary as much as $15 from one exchange to another, Grill said. "When the user comes to the machine, we know in real time what we can replenish it for [from an exchange] and lock in our profit at that initial point."

Coin Outlet's ATMs do not charge customers a transaction fee on account of the profit the company makes from arbitrage. Grill said some digital currency ATMs charge more than 5% transaction fee.

Coin Outlet began operating bitcoin ATMs last October. Grill did not want to release numbers, but he said sales have increased for each machine every month.

An Evolving Market

Data to date indicate there are just over 360 digital currency ATMs worldwide, according to CoinatmRadar.com, which tracks their placement worldwide. That's a small number in comparison to 3 million total ATMs worldwide reported by the ATM Industry Association.

But the number is destined to grow, considering the number of digital currency ATM manufacturers that have come on the market in the past few years (more than 30) and amount of money that some bitcoin organizations claim they are investing in ATMs.

According to Coinatm Radar, the top 10 digital currency ATM manufacturers, in order, are: Lamassu (120), Skyhook (59), Bit Access (44), Genesis Coin (41), Robocoin (40), General Bytes (23), BitXatm (7), Coin Outlet (5), Numoni (5) and HotButler (3).

Devices that provide cash-to-digital currency only are known as one-way ATMs and represent slightly more than 60% of the market, according to Coinatm Radar. Those that provide digital-currency-to-fiat and fiat-to-digital-currency are called two-way ATMs. Some systems allow operators to switch between one- and two-way transaction capabilities.

Regulations In Flux

Government regulation of digital currency is a work in progress. Hence, there are unanswered questions for all parties engaged in digital commerce, including ATM operators.

Coin Outlet's Grill said in the U.S., operators must pay a FinCEN (Federal Crimes Enforcement Network) registration fee. The U.S. Department of the Treasury last year stated that bitcoin exchangers are subject to the Bank Secrecy Act and are therefore required to register as a money services business. State requirements vary.

The New York Department of Financial Services recently revised its proposed Bit License regulatory scheme to include requirements for capital reserves, recordkeeping and reporting, anti-money laundering protocols and cybersecurity safeguards.

One prospective bitcoin ATM operator, Tom Truitt of Philadelphia, was discouraged by the requirement of having a money transmitter's license.

"To even apply for the license in Pennsylvania, one must pass a criminal background check, be bonded for a million dollars and have a net worth of half a million dollars," Truitt said. "That's assets minus liabilities. Otherwise, one may not profit from the exchange of money. If I'm bonded for a million dollars, why do I need to have a net worth of half that?"

His company, Liberty Vending, has since shifted its focus to retrofitting merchandise vending machines to accept bitcoin.

Despite the uncertainties, digital currency observers expect the industry will grow.

"If bitcoin gains traction to become a more widely accepted alternative currency, the bitcoin ATMs could become one of the most convenient distribution channels available to consumers for exchanging bitcoin from and into cash," said Sam M. Ditzion, founder and chief executive of Boston-based Tremont Capital Group, in discussing 2014 research on bitcoin on behalf of the ATM Industry Association. "While many consider it a fringe currency, Bitcoin -- or similar digital currencies with extraordinarily low transaction costs that may emerge in the future -- could have a significant impact on the global payments industry."

Retailers Benefits

For retailers, the digital currency ATM offers a way to let customers buy digital currency and spend it at the store.

At Zen Palate, a vegan Asian restaurant in midtown Manhattan, patrons can buy bitcoins from an ATM that sits on the restaurant's bar and can be seen from the street. The ATM distributes bitcoin from wallets and exchanges.

"A lot of shop owners have cash they have no place to put," said George Johnson, a partner in the restaurant. "It seems to be the right thing at the right time. Bitcoin in general and the ATM are going to be very serious."

While the ATM has been on site for only a few months at Zen Palate, "It's doing a little better than I thought it would," said Johnson. He said people are coming into the restaurant just to buy bitcoin. So far, the only way people know about the machine is either by word of mouth or by seeing it from outside the building.

Grand Rapids, MI-based Bitcoin Brands, which owns and operates the ATM at Zen Palate, pays the restaurant a commission on the sales, according to Johnson. "It's been awesome. I think there is money to be made here," Johnson said.

The restaurant's patrons cannot pay for their meals or leave tips in bitcoin at present. Peter Klamka, owner of Bitcoin Brands, said patrons will be able to pay using bitcoin in the near future, and may be able to leave tips. The ATM, made in Prague by General Bytes, allows a customer to pay a bill and designate a portion as a tip.

Klamka said retailers like bitcoin ATMs since they generate attention and build customer traffic, thereby improving sales.

Bitcoin Brands gives retail customers the choice of purchasing an ATM outright or contracting to allow the company to operate the machine in exchange for a commission. Thus far, most retail customers have opted for the commission arrangement.

Gyms And Marijuana Shops

BYTES FOR BITES:Bitcoin ATM serves customers at midtown Manhattan's Zen Palate

Blomgren's fighters now wear Bitcoin Brands logos on their shorts when they compete in front of the Pay Per View, Access TV and Spike TV cameras. In the near future, Blomgren hopes to allow his students to pay him in bitcoin.

One of the most receptive retail audiences for Klamka has been medical marijuana dispensaries. He sees the bitcoin ATM as a natural fit for this sector. He has placed a bitcoin ATM at one dispensary and is in the process of placing another two in the Grand Rapids area.

When Colorado and Washington voted to legalize recreational marijuana in 2012, digital currency supporters saw legalization as boosting the need for alternative payments. Marijuana became technically legal in the two states, but its legal and social status remained murky to the public at large.

Banks and credit card companies were reluctant to be in the pot business, forcing marijuana retailers to only accept cash. This proved problematic. Merchants had to pay employees in cash and had to purchase money orders to buy supplies and pay bills. As a result, they faced security issues associated with cash. Additionally, customers were not in the habit of using cash.

Hence, digital currency has proven a solution for marijuana dispensaries. Some marijuana entrepreneurs have gone as far as to establish pot-themed currencies with names like CannabisCoin, Potcoin and MaryjaneCoin.

Klamka uses an ATM made by Portland, OR-based Skyhook for his medical marijuana dispensaries. The ATM provides the customer a QR code that the clerk scans using a bitcoin payment tablet that Klamka provides them. "The [payment] technology is like a gift card," Klamka says. Copenhagen, Denmark's Coinify processes the bitcoin payment and the dispensary gets a percentage of the sales from the machine.

"A marijuana customer can buy bitcoin, buy whatever they want in the dispensary, pay using bitcoin and leave," explained Klamka, who describes this bitcoin payment method as "bitMD." As the name of his system indicates, he envisions pharmacies signing on to accept bitcoin payments for prescriptions and medical-testing services.

ATMs And Bitcoin Infrastructure

ATMs are an important part of one bitcoin company's plans to establish a big infrastructure. Bitcoin Shop Inc. (BTCS) of Arlington, VA, plans to expand its bitcoin ATM network, and in conjunction with its ATMs, will launch an e-commerce business. The company now offers bitcoin ATMs from BitXatm and Coin Outlet.

While developers can retrofit traditional ATMs to dispense digital currency, BTCS does not plan to go this route. "The regulatory and economic challenges are currently too unknown for traditional banks to make the investment to convert," said BTCS executive vice-president of corporate development Charles Kiser.

The ATMs will support BTCS' e-commerce initiative. BTCS will employ an "intelligent shopping engine" to find consumers and offer products from 250 retailers. It believes digital currency has unique benefits in the e-commerce sector since it enables fast and secure payments, low transaction fees, no chargebacks and an overall better purchasing experience.

"We're planning to build a universal platform for consumers to access the digital ecosystem," Kiser said. "E-commerce is one of the starting points and will be an on-ramp for users to access many of the products and services we integrate."

Another group of investors has begun a funding initiative to establish an international ATM network that will support bitcoin, local e-currencies and the network's own cryptocurrency called Dollar (rendered by the company as DOLLAR). The investors hope to create a decentralized electronic currency similar to bitcoin with low or no fees and faster transactions, said Jiri Hlavin, Dollar project coordinator. The Dollar ATM network and wallet will be managed by a Dollar Foundation, which will be established in the United Kingdom this spring, Hlavin reported.

"For example, when the ATM is placed in Great Britain, there will also be BRIT and SLG [sterlingcoin] coins for buying or selling," Hlavin said. "We will support all local e-currencies."

Existing ATMs will be retrofitted to dispense Dollar. "There is just the need to use Dollar source code by ATM operators," he said. "There is no need to update ATM hardware."

In the short term, Dollar will install 20 ATMs. A longer-term goal is to have 5,500 units worldwide by 2016. Dollar has set the following targets for ATM placements: North America, 1,500; South America, 500; Europe, 1,000; Africa, 500; and Asia, 2,000.

As the digital currency landscape expands, ATMs will become an integral part of the digital infrastructure. Founded to dispense cash, the ATM has found a new calling as currency begins its journey in the crypto economy.