Government Report Suggests Tightening Regulations on Crypto ATMs

Time:2022-01-16 Source: 951 views Policy Copy share

The use of crypto payments to facilitate illegal human and drug trafficking is rising, and the Government Accountability Office (GAO) is blaming crypto kiosks.

In a new study released Monday, the GAO – a government agency that provides auditing and investigative services for Congress – highlighted that the kiosks, also called crypto ATMs, were partly responsible for this surge because the machines are less regulated than crypto exchanges and transactions are more difficult to trace.

“As [crypto] market usage expands, FBI officials said they expect to see an increase in the use of virtual currency kiosks for illicit purposes, including for human and drug trafficking,” the report said.

The agency suggested the Internal Revenue Service and Financial Crimes Enforcement Network (FinCEN), both units of the U.S. Treasury Dept., should work together and take a firmer hand in regulating the kiosks.

The report examined the use of cryptocurrencies in global trafficking operations and how U.S. agencies, including the U.S. Postal Service (USPS), Immigration and Customs Enforcement (ICE) and the IRS are countering the rise in crypto-facilitated crime.

The GAO also considered the challenges agencies face in fighting crypto crime, finding that a pervasive lack of information, especially about crypto kiosks, was interfering with law enforcement’s ability to identify and stop criminals.

The GAO’s findings that crypto-enabled crime is rising are at odds with a new report from crypto research firm Chainalysis, which found that although crypto crime is increasing by volume, it reached an all-time low as a percentage of all blockchain transactions in 2021. In other words, as cryptocurrencies has become more mainstream, crypto crime will continue to rise, but the growth in above-board crypto transactions is outpacing illicit activity.

Human trafficking
The GAO report found that crypto can be used as a payment method for human trafficking – the umbrella term for both labor trafficking and sex trafficking – but is more common in payments to sex traffickers.

Citing research from Polaris, a U.S.-based non-profit that seeks to end human trafficking, the GAO’s report said that of 40 major online “commercial sex markets” which “may be used to facilitate sex trafficking,” over half (23 out of 40) accepted cryptocurrencies as a form of payment.

The increasing adoption of crypto payments for online sex marketplaces can, according to the GAO, be attributed to the difficulties of accepting credit and debit card payments – something that was seen last year when sex-focused content subscription service OnlyFans decided to ban porn after facing pressure from banks. The decision was ultimately reversed after OnlyFans received public backlash from fans.

Drug trafficking
The GAO’s report said that after the demise of the online dark web marketplace Silk Road in 2013, the overall dark web marketplace for illegal drugs has become more stable and harder for law enforcement to detect due to the proliferation of smaller marketplaces.

“When law enforcement shuts down one marketplace, criminals can easily move operations to other established marketplaces,” the GAO report reads.

This doesn’t mean the government is unable to seize crypto used in drug trafficking. In 2021 alone, the IRS seized $3.5 billion in crypto – $1 billion of which was tied to Silk Road.

During its investigation, the GAO found that, of all ICE investigations that involved crypto, 36% related to drug trafficking. For the IRS, a quarter of its crypto investigations were drug related. And for the USPS, a whopping 85% of the agency’s crypto seizures involved drug trafficking.

Money laundering
According to the GAO report, drug cartels and transnational criminal organizations (TCOs) are “increasingly using virtual currency because of its perceived anonymity and as a more efficient method to move money across international borders.”

Though the report highlights that the most common methods of money laundering – bulk cash smuggling and trade-based money laundering – haven’t changed, crypto is becoming a more common way to move money across borders without attracting the attention of law enforcement.

The GAO attributed the increasing popularity of crypto-enabled money laundering to the less-regulated kiosks, which offer more anonymity-enhancing features.

“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.”

Cracking down on kiosks
The GAO’s specific issue with crypto kiosks is that, though kiosk operators must register with FinCEN, they do not have to regularly update any law enforcement agency about the location of their kiosks. That “limits federal agencies’ ability to identify kiosks in areas that have been designated as high risk for financial crimes.”

By tightening regulation of these crypto kiosks, the GAO believes that law enforcement will be able to obtain improved information and be better able to identify “potentially illicit transactions.”

The GAO provided two recommendations to the IRS and FinCEN on how to improve the regulation of crypto kiosks.

The report suggested that the director of FinCEN and the commissioner of the IRS simultaneously review the money services business (MSB) registration requirements for crypto kiosks and other exchanges, and consider new requirements for kiosk operators to regularly update law enforcement on the physical addresses of their kiosks.

According to the GAO, the IRS and FinCEN concurred with the recommendations.

By Cheyenne Ligon

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