A man uses a bitcoin kiosk. Stock photo via Pexels

In an attempt to protect Vermonters from scammers, lawmakers recently passed what could become the state’s first law regulating cryptocurrency kiosks, which allow people to quickly buy virtual currencies with cash or debit cards.

A person holds a physical Bitcoin in front of a kiosk. Photo by BTC Keychain via Flickr

Among the provisions included in the H.659 are a daily transaction limit, a cap on fees on exchanges and a one-year moratorium on installing any new machines in the state, which would take effect at the end of June.

Although Gov. Phil Scott had not yet seen the final text of the bill, his spokesman, Jason Maulucci, said “the Department of Financial Regulation is comfortable” with its provisions.

Kiosks look like standard ATMs that allow consumers to connect to their banks from locations like gas stations and bars, but they are actually very different. Instead, the machines sell “cryptocurrency,” the nickname for a wide range of digital currencies that don’t 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 alternating amendments between the two legislative chambers, the Chamber approved the Senate version of the bill on April 25.

As of Monday morning, the governor had not yet received the bill but was expecting it soon, 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 routine household chore, a Vermont Captive Insurance Laws Update. In the Senate Finance Committee, however, a new section appeared, entitled “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 warned about crypto scams repeatedly in recent years.

“This is about protecting Vermonters’ savings,” Cummings said.

A vector of fraud

The difficulty in tracking cryptocurrencies and cash has led to “Bitcoin ATMs” a powerful vector of fraud. If a scammer manages to convince a victim to trade large sums of money for cryptocurrency on one of these machines, there will be no intermediary bank to freeze the transaction. Once the money is transferred to the scammer’s virtual wallet, it is practically impossible to get it back.

To prevent Vermonters from losing too much money at once, lawmakers included a $1,000 daily transaction limit in the bill.

“This is meant to slow down the speed 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 kiosk operators can charge on each exchange.

In testimony to the House Commerce CommitteeRepresentatives of two kiosk operators in Vermont argued that the regulation would effectively prevent them from operating in the state.

“Sometimes when you get to a very rural location, it’s more expensive to send an armed guard there to get the money,” said Larry Lipka, senior vice president at CoinFlip, which operates three kiosks in Vermont. He pointed to Californiawhere the fee cap is 15%, allowing companies to recover more costs.

Mark Smalley, chief compliance officer at Bitcoin Depot, said the possible departure of kiosk operators would hurt small businesses. These companies pay rent for space to store their machines, usually in convenience stores or tobacco stores.

Bitcoin Depot operates 23 staffed locations, which would not be subject to the new regulations, in Vermont. It also has three crypto kiosk registrations pending with the Department of Financial Regulation.

Governor Phil Scott answers a question during his weekly press conference at the Statehouse in Montpelier on Wednesday, April 3, 2024. Photo by Glenn Russell/VTDigger

During more than an hour of testimony, lawmakers grilled executives about whether their companies were doing enough to protect their customers from fraud.

A significant portion of crypto kiosk users are, in CoinFlip’s own words“underbanked and low-income individuals who wish to transact primarily in cash,” leaving them especially exposed to the loss of their savings if they fall victim to fraud.

Lipka said CoinFlip’s kiosk screens warn of scams and instruct users to call its 24/7 hotline if a third party sends them there to make a transaction.

“Additionally, CoinFlip permanently blacklists high-risk digital wallet addresses to prevent them from being used again at a CoinFlip kiosk,” he said.

When pressed by Rep. Kirk White, D/P-Bethel, about whether nefarious actors could easily create new wallets to avoid blacklisting, Lipka admitted that they could.

“Companies always say, ‘If you do this to us, we’ll go bankrupt,’” Cummings said when asked about the House testimony. “You have to look at the numbers and make the best decision possible.”

‘We are 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 “ATM”.

“You know, we call them ATMs because that’s what they look like and make people feel comfortable,” Lipka said. “But we are not an ATM. You are not accessing your own money. We’re selling something you buy voluntarily.”

Rep. Heather Chase, D-Chester, appeared shocked by his comments.

“Did you just say you call them ATMs, not that they are, to make people feel comfortable with it?” she asked.

“We (called them ATMs) in the past,” Lipka said. “We prefer crypto kiosks… because that’s what it really is. It’s not an ATM because it’s not connected to a bank.”

On your website, CoinFlip advertises itself as “a coast-to-coast bitcoin ATM network.” A photo of CoinFlip physical machine on the company’s landing page includes the words “Bitcoin ATM” written prominently below the touchscreen.

However, the legislation could have been even harsher on kiosk operators. The House amendment to H.659 would have prohibited all kiosks from operating for two years. The Senate reduced this to a one-year moratorium on registering new machines.

“We have people who have put their money into the kiosks, so there was a concern that they wouldn’t be able to access their savings,” Cummings said.

Sen. Ann Cummings, D-Washington, chairwoman of the Senate Finance Committee, speaks at the Statehouse in Montpelier on Tuesday, Jan. 30, 2024. Photo by Glenn Russell/VTDigger

If the bill became law, the commissioner of financial regulation would have to inform lawmakers by January 2025 about whether the legislation is doing enough to protect Vermonters.

Cummings said the newness of cryptocurrency meant it took a while for lawmakers to catch on to the issue.

“This is a whole new world,” Cummings said. “We probably won’t get it right the first time.”

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