Digital Asset Predation: Bitcoin Teller Machines Pose Troubling Risks

Bitcoin teller machines (BTMs), kiosks that offer cryptocurrency conversions, have surged in popularity during the pandemic. However, concerns arise over their disproportionate placement in areas with a majority of Black and Latino residents, charging fees as high as 22% per transaction. Critics argue that BTMs, often operated by companies like Bitcoin Depot, represent a form of predatory inclusion, targeting financially vulnerable communities with high-cost services. The industry's focus on offering convenience and accessibility raises questions about its potential to contribute to financial inequality and highlight the need for scrutiny of its practices.

Digital Asset Predation: The Troubling Rise of Bitcoin Teller Machines

As digital assets regain prominence following a period of market decline, experts sound an alarm over the predatory financial practices embedded within the industry's most tangible manifestation: Bitcoin teller machines (BTMs).

Found in high-traffic locations such as gas stations, convenience stores, and liquor stores, BTMs offer physical access to cryptocurrency conversions. The industry witnessed a surge during the pandemic, with the number of installed units nationwide skyrocketing by more than five-fold over four years, reaching approximately 31,100 as of 2023, according to Coin ATM Radar.

However, a closer examination reveals a concerning pattern: BTMs are disproportionately located in areas with predominantly Black and Latino residents. Furthermore, transaction fees are exorbitantly high, reaching as much as 22% per transaction.

Bitcoin Depot, the largest U.S. operator with over 7,300 BTMs, levies some of the industry's heftiest fees while promoting financial inclusion, a concept that emphasizes accessibility to banking and financial services regardless of socioeconomic status. According to the company's investor presentation in November 2023, over 80% of Bitcoin Depot's customers earn less than $80,000 annually.

"It appears to be a positive development, but there are significant downsides," cautions Franklin Noll, lead payments specialist at the Federal Reserve Bank of Kansas City. "It's like payday lenders offering 'instant cash for your paycheck' at a steep fee of 25% or 30%."

A Bloomberg analysis of Bitcoin Depot locations and U.S. Census Bureau data reveals a correlation between states with higher proportions of Black and Latino populations and increased concentrations of the company's BTMs, particularly in Southern states such as Georgia and Texas.

Despite these observations, Brandon Mintz, President and CEO of Bitcoin Depot, dismisses any suggestion that the company deliberately targets underserved communities for BTM placement. "We have never based our site selection on any form of racial profiling," Mintz told Bloomberg News. "Our focus is on selecting areas with low competition and sufficient population density to support a profitable ATM operation."

BTM placement generally requires the cooperation of local store owners. Some machines are deployed at major gas stations and convenience store chains like Circle K, Cumberland Farms, and Jacksons Food Stores. In exchange for floor space, store owners may receive a small commission from the machine operator. Alternatively, they might rent the machine out to the operator.

Inquiries at stores across multiple states, including California, Indiana, New Jersey, and Maryland, yielded limited knowledge about the BTMs. When questioned about the duration of BTM installation, daily usage, and transaction fees, employees often deferred questions to store owners who were either unavailable or had minimal understanding of the device's operation.

One restaurant owner in Essex, Maryland, who declined to be named, revealed that Bitcoin Depot pays $145 monthly for the kiosk installed a month prior. Another store owner in New Jersey, identified only as Jai, disclosed a monthly payment of $200 for the kiosk, also operated by Bitcoin Depot.

A Bitcoin Depot spokesperson advised store owners to direct kiosk users with service requests to the company's customer service department.

Fees at BTMs vary across operators, often incorporating a flat transaction charge and a percentage-based fee proportional to the transaction's size. Some researchers have labeled this fee structure as "predatory inclusion," where businesses provide access to a service at an exorbitant and sometimes concealed cost.

In Alabama, the concentration of Black and Latino residents within a one-mile radius of Bitcoin Depot BTMs exceeds the statewide average by 20 percentage points, according to a Bloomberg analysis of location data and the 2022 American Consumer Survey. In Dallas, BTMs are consistently located in neighborhoods with the highest percentages of Black and Latino residents. Similar patterns emerge in Northeastern states like Connecticut and New Jersey, while the West and Midwest exhibit less pronounced correlations.

Bitcoin Depot's filings indicate that "demographic data" is a factor in selecting new machine locations. However, Mintz clarifies that this data refers solely to "population and population density."

Advocates of cryptocurrency often present it as a means of reaching unbanked individuals who lack access to traditional bank accounts. In 2022, this population accounted for 6% of U.S. adults, according to the Federal Reserve. Black and Hispanic individuals were more likely to be unbanked than their White counterparts.

However, a paper published by the Brookings Institution in October 2022 suggests that the narrative of crypto serving the underbanked and bridging racial wealth gaps through investment is often misleading. "Until more evidence is available on the technology's effectiveness and adequate consumer protections are established, policymakers should be skeptical of claims that crypto will promote financial inclusion," wrote Tonantzin Carmona, Brookings Metro fellow.

According to Dr. Jocelyn Evans, the Henry W. Bloch endowed professor of finance and an associate dean at the University of Missouri-Kansas City, BTM industry practices bear striking similarities to predatory financial services such as payday lending and subprime loans that disproportionately target Black communities.

"I fail to see how this benefits the underserved community when the costs are so excessive, the conversion back to cash is complex, and the likelihood of losing money is almost certain," said Evans, whose upcoming research report found "a pattern of ethnic targeting" in the placement of BTMs in Kansas City. The report examined all BTMs in the city, not solely those operated by Bitcoin Depot.

Opaque Transaction Fees

Store employees expressed a general lack of knowledge regarding BTM fees. John Carlo Giovanni, a manager at Buy Rite Liquors in Ventnor City, New Jersey, recalled a machine technician offering to demonstrate the device's operation, but only after a minimum $20 deposit. (The Buy Rite BTM allows purchases ranging from $20 to $25,000.) The manager at Marrazzo's Market in Ewing Township, New Jersey, admitted to being unaware of the store's BTM transaction fees.

Access to fee details on Bitcoin Depot ATMs requires initiating a transaction. Typically, customers receive a notification of applicable rates before confirming their purchase, according to the company.

Mintz, Bitcoin Depot's CEO, disclosed that the company generally retains a "low twenties" percentage of each transaction as its fee but declined to provide specific boundaries. "It's not fixed; it depends on market conditions and our expenses," Mintz said. The company also imposes a flat $3 fee on all transactions and became the first in the industry to go public through a special purpose acquisition company merger last year, with shares priced at $10 each.

Mintz emphasized that operating expenses heavily influence the fee structure and that the machines' physical presence serves as a primary selling point for customers. "Numerous other platforms offer lower fees for Bitcoin purchases," he said. "Ours is a more convenient option."

Bitcoin Depot's main competitors, CoinFlip and Bitstop, also charge transaction fees as high as 22%, varying depending on the location, as confirmed by company representatives and customer service agents. CoinFlip additionally levies a $2.49 "network fee" on every transaction.

The grocery store manager in New Jersey stated that the Bitcoin Depot-operated kiosk was installed last year by the store owner, who has since passed away. Despite the meager foot traffic generated by the BTM, Jeff, who withheld his last name, sees no reason to remove it due to its minimal space occupancy and the monthly stipend it earns the store from Bitcoin Depot. The liquor store manager, on the other hand, estimates that about four to five individuals use the kiosk daily. "Some customers make purchases and then use the BTM afterwards, but many come in specifically for it and leave immediately," he remarked.

Bitcoin Depot has submitted an application to operate in New York, which it anticipates will be approved by June 2023. This expansion could translate to 2,500 to 3,000 additional BTMs in the state. Hal Goetsch, a senior analyst at B Riley Securities Inc. who covers Bitcoin Depot, believes that the pending license approval could increase the company's footprint by 30%.

"It could potentially be their most lucrative market," said Goetsch, citing New York's high population density, immigrant population, and prevalence of foreign remittances.

The New York State Department of Financial Services, which oversees the application process, declined to comment.

Aaron Klein, a senior fellow at the Brookings Institution's Center on Regulation and Markets, opines that the expansion of Bitcoin tellers, regardless of the operator, serves more as a marketing ploy than an indication of widespread usage. The vast majority of BTMs in the U.S. - approximately 92%, as per Coin ATM Radar - do not facilitate the sale of crypto for cash.

"Bitcoin is an asset that masquerades as a payment instrument," said Klein. "And it's dangerous if you can buy something but can't sell it."