Existing law requires a bank, savings association, credit union, industrial loan company, savings bank, or other business entity, or a person who operates an automated teller machine to adopt procedures for evaluating the safety of an automated teller machine, including the incidence of crimes of violence in the immediate neighborhood of the automated teller machine as reflected in the records of the local law enforcement agency and of which the operator has actual knowledge.

This bill would provide for the regulation of digital financial asset transaction kiosks, as defined, by the Department of Financial Protection and Innovation. The bill would, among other things, prohibit an operator, as defined, from accepting or dispensing more than $1,000 in a day from or to a customer via a digital financial asset transaction kiosk. The bill would require, on or after January 1, 2025, an operator, before a digital financial asset transaction, to provide a written disclosure in English and in the same language principally used by the operator to advertise, solicit, or negotiate with a customer containing the terms and conditions of the transaction, including the amount of a digital financial asset involved in the transaction. The bill would require an operator to provide a customer with a receipt for any transaction made at the operators digital financial asset transaction kiosk that includes certain information, including the name of the customer and the date and time of the transaction. The bill would require an operator to provide to the department a list of all locations of digital financial asset transaction kiosks that the operator owns, operates, or manages in this state and would require the department to make that list for each operator available to the public on the departments internet website.

This bill would become operative only if AB 39 of the 202324 Regular Session is enacted and takes effect on or before January 1, 2024.

Existing law requires a bank, savings association, credit union, industrial loan company, savings bank, or other business entity, or a person who operates an automated teller machine to adopt procedures for evaluating the safety of an automated teller machine, including the incidence of crimes of violence in the immediate neighborhood of the automated teller machine as reflected in the records of the local law enforcement agency and of which the operator has actual knowledge.

This bill would provide for the regulation of digital financial asset transaction kiosks, as defined, by the Department of Financial Protection and Innovation. The bill would, among other things, prohibit an operator, as defined, from accepting or dispensing more than $1,000 in a day from or to a customer via a digital financial asset transaction kiosk. The bill would require, on or after January 1, 2025, an operator, before a digital financial asset transaction, to provide a written disclosure in English and in the same language principally used by the operator to advertise, solicit, or negotiate with a customer containing the terms and conditions of the transaction, including the amount of a digital financial asset involved in the transaction. The bill would require an operator to provide a customer with a receipt for any transaction made at the operators digital financial asset transaction kiosk that includes certain information, including the name of the customer and the date and time of the transaction. The bill would require an operator to provide to the department a list of all locations of digital financial asset transaction kiosks that the operator owns, operates, or manages in this state and would require the department to make that list for each operator available to the public on the departments internet website.

This bill would become operative only if AB 39 of the 202324 Regular Session is enacted and takes effect on or before January 1, 2024.

Existing law requires a bank, savings association, credit union, industrial loan company, savings bank, or other business entity, or a person who operates an automated teller machine to adopt procedures for evaluating the safety of an automated teller machine, including the incidence of crimes of violence in the immediate neighborhood of the automated teller machine as reflected in the records of the local law enforcement agency and of which the operator has actual knowledge.

This bill would provide for the regulation of digital financial asset transaction kiosks, as defined, by the Department of Financial Protection and Innovation. The bill would, among other things, prohibit an operator, as defined, from accepting or dispensing more than $1,000 in a day from or to a customer via a digital financial asset transaction kiosk. The bill would require require, on or after January 1, 2025, an operator, before a digital financial asset transaction, to provide a written disclosure in English and in the same language principally used by the operator to advertise, solicit, or negotiate with a customer containing the terms and conditions of the transaction, including the amount of a digital financial asset involved in the transaction. The bill would require an operator to provide a customer with a receipt for any transaction made at the operators digital financial asset transaction kiosk that includes certain information, including the name of the customer and the date and time of the transaction. The bill would require an operator to provide to the department a list of all locations of digital financial asset transaction kiosks that the operator owns, operates, or manages in this state and would require the department to make that list for each operator available to the public on the departments internet website.

This bill would make conforming changes to the provisions described above become operative only if AB 39 of the 202324 Regular Session is enacted and takes effect on or before January 1, 2024.

Existing law requires a bank, savings association, credit union, industrial loan company, savings bank, or other business entity, or a person who operates an automated teller machine to adopt procedures for evaluating the safety of an automated teller machine, including the incidence of crimes of violence in the immediate neighborhood of the automated teller machine as reflected in the records of the local law enforcement agency and of which the operator has actual knowledge.

This bill would provide for the regulation of digital financial asset transaction kiosks, as defined, by the Department of Financial Protection and Innovation. The bill would, among other things, prohibit an operator, as defined, from accepting or dispensing more than $1,000 in a day from or to a resident customer via a digital financial asset transaction kiosk. The bill would require an operator, before a digital financial asset transaction, to provide a written disclosure in English and in the same language principally used by the operator to advertise, solicit, or negotiate with a resident customer containing the terms and conditions of the transaction, including the amount of a digital financial asset involved in the transaction. The bill would require an operator to provide a resident customer with a receipt for any transaction made at the operators digital financial asset transaction kiosk that includes certain information, including the name of the resident customer and the date and time of the transaction. The bill would require an operator to provide to the department a list of all locations of digital financial asset transaction kiosks that the operator owns, operates, or manages in this state and would require the department to make that list for each operator available to the public on the departments internet website.

Existing law requires a bank, savings association, credit union, industrial loan company, savings bank, or other business entity, or a person who operates an automated teller machine to adopt procedures for evaluating the safety of an automated teller machine, including the incidence of crimes of violence in the immediate neighborhood of the automated teller machine as reflected in the records of the local law enforcement agency and of which the operator has actual knowledge.

This bill would provide for the regulation of digital financial asset transaction kiosks, as defined, by the Department of Financial Protection and Innovation. The bill would, among other things, prohibit an operator, as defined, from accepting or dispensing more than $1,000 in a day from or to a resident via a digital financial asset transaction kiosk. The bill would require an operator, before a digital financial asset transaction, to provide a written disclosure in English and in the same language principally used by the operator to advertise, solicit, or negotiate with a resident containing the terms and conditions of the transaction, including the amount of a digital financial asset involved in the transaction. The bill would require an operator to provide a resident with a receipt for any transaction made at the operators digital financial asset transaction kiosk that includes certain information, including the name of the resident and the date and time of the transaction. The bill would require an operator to provide to the department a list of all locations of digital financial asset transaction kiosks that the operator owns, operates, or manages in this state and would require the department to make that list for each operator available to the public on the departments internet website.

Existing law requires a bank, savings association, credit union, industrial loan company, savings bank, or other business entity, or a person who operates an automated teller machine to adopt procedures for evaluating the safety of an automated teller machine, including, including the incidence of crimes of violence in the immediate neighborhood of the automated teller machine as reflected in the records of the local law enforcement agency and of which the operator has actual knowledge.

This bill would provide for the regulation of digital financial asset transaction kiosks, as defined, by the Department of Financial Protection and Innovation. The bill would, among other things, prohibit an operator, as defined, from accepting or dispensing more than $1,000 in a day from or to a resident via a digital financial asset transaction kiosk. The bill would require an operator to provide a resident with a receipt for any transaction made at the operators digital financial asset transaction kiosk that includes certain information, including the name of the resident and the date and time of the transaction. The bill would require an operator to provide to the department a list of all locations of digital financial asset transaction kiosks that the operator owns, operates, or manages in this state and would require the department to make that list for each operator available to the public on the departments internet website.

Existing law requires a bank, savings association, credit union, industrial loan company, savings bank, or other business entity, or a person who operates an automated teller machine to adopt procedures for evaluating the safety of an automated teller machine, including, the incidence of crimes of violence in the immediate neighborhood of the automated teller machine as reflected in the records of the local law enforcement agency and of which the operator has actual knowledge.

This bill would provide for the regulation of digital financial asset transaction kiosks, as defined, by the Department of Financial Protection and Innovation. The bill would, among other things, prohibit an operator, as defined, from accepting or dispensing more than $1,000 in a day from or to a resident via a digital financial asset transaction kiosk. The bill would require an operator to provide a resident with a receipt for any transaction made at the operators digital financial asset transaction kiosk that includes certain information, including the name of the resident and the date and time of the transaction. The bill would require an operator to provide to the department a list of all locations of digital financial asset transaction kiosks that the operator owns, operates, or manages in this state and would require the department to make that list for each operator available to the public on the departments internet website.

 UNFINISHED BUSINESS  

Bill No: SB 401

Author: Limón (D) and Atkins (D)

Amended: 9/8/23

Vote: 21

SENATE BANKING & F.I. COMMITTEE: 5-0, 3/29/23

AYES: Limón, Bradford, Caballero, Min, Portantino

NO VOTE RECORDED: Niello, Nguyen

SENATE APPROPRIATIONS COMMITTEE: 5-1, 5/18/23

AYES: Portantino, Ashby, Bradford, Wahab, Wiener

NOES: Jones

NO VOTE RECORDED: Seyarto

SENATE FLOOR: 32-6, 5/24/23

AYES: Allen, Alvarado-Gil, Archuleta, Ashby, Atkins, Becker, Blakespear, Bradford, Caballero, Cortese, Dodd, Durazo, Eggman, Glazer, Gonzalez, Hurtado, Laird, Limón, McGuire, Menjivar, Min, Newman, Padilla, Portantino, Roth, Rubio, Skinner, Smallwood-Cuevas, Stern, Umberg, Wahab, Wiener

NOES: Dahle, Grove, Jones, Niello, Ochoa Bogh, Wilk

NO VOTE RECORDED: Nguyen, Seyarto

ASSEMBLY FLOOR: 57-17, 9/13/23 - See last page for vote

SUBJECT: Digital financial asset transaction kiosks

SOURCE: Author

DIGEST:

This bill provides for the regulation of digital financial asset transaction kiosks, including limits on the total amount of transactions in a day, fee limitations, and a requirement to provide a receipt for every transaction.

Assembly Amendments

increase permissible fees from 10% to 15% of transaction amounts, require a specified disclosure be provided to customers prior to effecting a transaction, delay the operative date of specified provisions to January 1, 2025, or July 1, 2025, add contingent enactment language providing that this bill shall not go into effect unless AB 39 (Grayson) of this legislative session is also enacted, and makes technical and clarifying changes.

ANALYSIS:

Existing law:

1. Establishes the Department of Financial Protection and Innovation (DFPI) as the state agency responsible for licensing, regulating, and supervising a range of entities that provide financial products or services to California consumers, including but not limited to, securities issuers, broker-dealers, investment advisers, and investment advisers representatives; persons offering or selling off-exchange commodities; persons holding securities as custodians on behalf of securities owners; money transmitters; and persons offering or providing consumer financial products or services. (Financial Code Section 300)
2. Provides the California Consumer Financial Protection Law (CCFPL), which authorizes DFPI to take enforcement action against a person that engages in an unlawful, unfair, deceptive, or abusive act or practice with respect to consumer financial products or services. (Division 24 of the Financial Code, commencing with section 90000)

This bill:

1. Defines “digital financial asset transaction kiosk” as an electronic information processing device that is capable of accepting or dispensing cash in exchange for a digital financial asset.
2. Prohibits an operator of a digital financial asset transaction kiosk from the following:
   1. Accepting or dispensing more than $1,000 in a day from or to a resident.
   2. Collecting charges, whether direct or indirect, related to a single digital financial asset transaction that exceed the greater of five dollars ($5) or fifteen percent of the United States dollar equivalent of digital financial assets involved in the transaction.
3. Requires an operator to do the following:
   1. Provide a specified disclosure prior to effecting a digital financial asset transaction.
   2. Provide a receipt with specified information for any transaction made at a kiosk.
   3. Provide a list of all kiosk locations to DFPI, which DFPI shall make publicly available on its website.
4. Places the provisions of this bill into the new division of the Financial Code proposed by AB 39 (Grayson) of this legislative session and provides that this bill will not be effective unless AB 39 is also enacted.

Comments

According to the author:

SB 401 establishes consumer protections for crypto kiosks to reduce fraud and other criminal activity and rein-in high mark-ups on crypto transactions. The bill mitigates the risk of transactions related to fraud and other criminal activity by limiting the amount of transactions to no more than $1,000 per customer per day. The bill also requires an operator of a crypto kiosk to provide a detailed receipt to a consumer with specified information about the transaction and caps the transaction fees that operators can charge to no more than $5 or 15% of the value of the transaction, whichever is greater.

Background

A digital financial asset transaction kiosk (more colloquially known as a “crypto kiosk”) is a physical machine that allows a consumer to buy and sell crypto assets, like bitcoin or ether, using cash, debit or credit card, or bank transfer. Crypto kiosks are often found in grocery, convenience, or liquor stores, and generally target consumers who are less technologically savvy and less knowledgeable about crypto markets than consumers who purchase crypto assets on online and mobile platforms, such as Coinbase and Kraken.

Operators of crypto kiosks are not subject to any state oversight or regulation of their business practices. The Department of Financial Protection and Innovation has not deemed crypto assets as “money” under state money transmission laws, and California has yet to enact a regulatory framework for crypto-related business activities. Under federal law, operators must comply with laws designed to combat money laundering and terrorist financing, but consumers in California enjoy no legal protections designed to protect their financial interests when transacting at crypto kiosks. According to Coin ATM Radar, there are over 3,300 crypto kiosks operating in California.^[1]

1. The use of Crypto Kiosks for Criminal Activity

Crypto kiosks have garnered negative attention from law enforcement for their use in various criminal activities. These criminal activities can generally be organized in two categories: fraud and organized crime.

Fraud

The very design of crypto kiosks makes them an attractive vector for scammers and fraudsters seeking to take advantage of people. According to TRM Labs, a leading blockchain analytics company:

Crypto ATMs are marketed as tools to help individuals convert their money into crypto with maximum privacy and ease, and less friction than at crypto exchanges. Crypto ATMs can be an attractive payment method for elderly people and others who might be otherwise unfamiliar with crypto. These characteristics also make them attractive vehicles for scammers.

Cash-to-crypto services are not associated with any one particular type of scam. Instead they are used by perpetrators of romance scams, investment scams, impersonation scams and others as neutral platforms enabling payment by victims.^[2]

TRM is aware of $40 million sent to known scam addresses via cash-to-crypto services, such as crypto kiosks, in 2022, making up 4% of the total cash-to-crypto market. TRM acknowledged that figure will likely be adjusted upward as new schemes become unmasked.

The Federal Bureau of Investigation (FBI) recently issued an alert regarding a spike in crypto investment schemes.^[3] The FBI release states:

The schemes are socially-engineered and trust-enabled, usually beginning with a romance or confidence scam and evolving into cryptocurrency investment fraud. Criminals use fictitious identities to develop relationships and build rapport with victims. Criminals target victims using dating applications (apps), social media platforms, professional networking sites, or encrypted messaging apps.

Once trust is established with victims, criminals introduce the topic of cryptocurrency and claim to have expertise, or an affiliation with experts, who can help potential investors achieve financial success. Criminals then convince victims to use fraudulent websites or apps, controlled by the criminals, to invest in cryptocurrency. Criminals coach victims through the investment process, show them fake profits, and encourage victims to invest more. When victims attempt to withdraw their money, they are told they need to pay a fee or taxes. Victims are unable to get their money back, even if they pay the imposed fees or taxes.

Crypto kiosks are not the exclusive or even primary means through which crypto-related frauds and scams are conducted, and some operators take measures to prevent and combat these forms of fraud from being perpetrated through their machines. Other operators, however, toe the line of negligence to outright criminal conspiracy in allowing their machines to be used for fraud, as indicated by a recent indictment of a crypto kiosk operator in Ohio who allegedly has knowingly benefited from victims of crypto scams.^[4]

Organized crime

Federal government agencies have cited the use of crypto kiosks to facilitate drug and human trafficking and other organized crime. The Governmental Accountability Organization (GAO) published a report in December 2021 discussing the use of online marketplaces and crypto assets in drug and human trafficking.^[5] The report cites findings from the Drug Enforcement Agency (DEA) that Mexican and Colombian transnational criminal organizations have used crypto kiosks to transfer proceeds internationally. The GAO report estimated kiosks have been rapidly increasing in the U.S., growing from about 560 in January 2017 to over 22,600 as of September 1, 2021. As market usage expands, FBI officials told the GAO that they expect to see an increase in the use of crypto kiosks for illicit purposes, including for human and drug trafficking.

1. Consumer Protection Concerns

As previously mentioned, crypto kiosks cater more toward consumers with low information about crypto markets, rather than consumers with high information. Targeting a less informed consumer segment raises concerns that an operator of crypto kiosks will price its offerings less competitively, knowing that its customer base is less likely to shop around for the best value. This concern is generally reflected in the marketplace with crypto kiosks typically collecting charges of 12 – 25% over the value of crypto assets, compared to trading fees of less than 1% on popular online platforms.

Kiosk operators attempt to justify high fees and mark-ups by pointing to their cost structures. According to operators, crypto kiosks are costly to provide, with significant expenses related to rents (i.e., payments to retailers for placing the kiosks in their stores) and cash handling (i.e., ensuring the kiosks are stocked with sufficient cash and that cash receipts are picked up timely and deposited in an operator’s bank account). Additionally, it is likely that many kiosks experience very low utilization with only a few customers per day or week, exacerbating the economic challenges of operating a kiosk profitably without charging high mark-ups. The Legislature faces the question of whether consumers with low information about crypto markets should bear the costs of inefficient business models employed by kiosk operators.

In addition to high fees, many crypto kiosks require consumers to create a non-custodial digital wallet in which to hold their crypto assets. While opponents of this bill attempt to spin this feature as a consumer protection, non-custodial wallets present significant risks, especially to consumers who lack technological sophistication and knowledge of crypto-related technologies. Unlike crypto assets held in a custodial wallet at a major exchange, such as Coinbase, if a consumer loses or forgets their password to access their non-custodial wallet, their crypto assets are lost forever – there is no customer service to call or password reset option to recover their access. Given the customer segment that operators admittedly target (i.e., consumers who are typically unfamiliar with crypto markets), this mechanism for storage presents significant risk of loss that are unusual in traditional financial institutions, like banks, money transmitters, and securities brokerage accounts.

1. Approach of this Bill

This bill addresses the risks posed by crypto kiosks in several ways. In response to concerns about the use of crypto kiosks for fraud and other criminal activity, this bill seeks to mitigate the size of financial harm related to fraud and deter the use of kiosks by criminal organizations by limiting the size of transactions that any person can initiate to $1,000 per day. To improve oversight of the industry, this bill requires operators to provide DFPI with the locations of all kiosks, which DFPI is required to post online, and to be licensed pursuant to AB 39 (Grayson). This transparency and licensure requirement will help both DFPI and local law enforcement crackdown on unregistered kiosks that they discover when investigating complaints. To address consumer protection concerns, this bill requires operators to provide specified disclosures and receipts, and to limit onerous fees, this bill caps charges at no greater than $5 per transaction or 15% of the transaction amount, whichever is greater.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

According to the Assembly Appropriations Committee, ongoing costs of approximately $2.7 million to DFPI to provide oversight of DFA transaction kiosks (Financial Protection Fund). DFPI anticipates enforcement efforts will be similar to those undertaken in DFPI's existing licensure programs, necessitating multiple additional staff positions to establish relationships with operators and ensure compliance.

SUPPORT: (Verified 9/12/23)

California Police Chiefs Association
Consumer Federation of California
Older Women's League Sacramento Capitol

OPPOSITION: (Verified 9/12/23)

American Petroleum and Convenience Store Association
Athena Bitcoin
ATM Industry Association
Bitmachina
Bitstop
Budget Coinz
Cal Asian Chamber of Commerce
California Black Chamber of Commerce
California Fuels and Convenience Alliance
California Grocers Association
California Hispanic Chamber of Commerce
Cash2bitcoin
Chamber of Digital Commerce
Coin Time
Coinflip
Digitalcoin
General Bytes
Genesis Coin
Instabitatm
Kiosk Manufacturer Association
National Bitcoin ATM
Neighborhood Market Association
Powercoin
Rockitcoin
Westcliff Technologies, Inc.

ARGUMENTS IN SUPPORT: The Consumer Federation of California writes:

"Proper regulation and consumer protections are vitally important when it comes to the arena of cryptocurrency, an extremely volatile area of financial mechanisms where a consumer's wellbeing can be on the line…crypto ATMs not only charge an enormous transaction fee for the purchase or sale of crypto assets, with fees typically adding 12%-25% to the purchase price of a crypto asset, but they also serve as hotbeds to cover up illicit activity…SB 401 seeks to reduce Californian's exposure to financial harm associated with crypto kiosks and for that reason we respectfully ask for your support and aye vote on this bill."

ARGUMENTS IN OPPOSITION: The Blockchain Advocacy Coalition, along with a number of industry stakeholders, writes in opposition:

"Cryptocurrency kiosks operate as convenient, fast, and familiar currency exchanges, allowing everyday people the opportunity to purchase or sell cryptocurrency at their local convenience stores, grocery stores, or bodegas.

“SB 401 sets up a licensing regime for the industry, which will allow the CA Department of Financial Protection & Innovation to approve, audit, and collect information about all crypto kiosk operators in the state. This regime is welcomed by the industry and the consumers that use them. It will help create a statewide regulatory framework, increase protection for consumers, and help weed out bad actors. However, SB 401 also sets up an arbitrary fee cap and transaction limit amount, which given the capital costs of owning, installing, maintaining, and

operating a crypto kiosk, would drive these machines out of our communities and out of the state."

ASSEMBLY FLOOR: 57-17, 9/13/23

AYES: Addis, Aguiar-Curry, Alvarez, Arambula, Bauer-Kahan, Bennett, Berman, Boerner, Bonta, Bryan, Calderon, Juan Carrillo, Wendy Carrillo, Cervantes, Connolly, Mike Fong, Friedman, Gabriel, Garcia, Gipson, Grayson, Haney, Hart, Holden, Irwin, Jackson, Jones-Sawyer, Kalra, Lee, Low, Lowenthal, Maienschein, McCarty, McKinnor, Muratsuchi, Ortega, Pacheco, Papan, Pellerin, Rendon, Reyes, Luz Rivas, Rodriguez, Blanca Rubio, Santiago, Schiavo, Soria, Ting, Valencia, Villapudua, Ward, Weber, Wicks, Wilson, Wood, Zbur, Robert Rivas

NOES: Alanis, Chen, Megan Dahle, Davies, Essayli, Flora, Vince Fong, Gallagher, Hoover, Lackey, Mathis, Jim Patterson, Joe Patterson, Sanchez, Ta, Waldron, Wallis

NO VOTE RECORDED: Bains, Dixon, Stephanie Nguyen, Petrie-Norris, Quirk-Silva, Ramos

Prepared by: Michael Burdick / B. & F.I. /

9/14/23 10:45:33

**** END ****

1. https://coinatmradar.com/state/6/bitcoin-atm-california/ ↑

2. https://www.trmlabs.com/post/crypto-atm-payments-linked-to-known-scam-addresses ↑

3. https://www.ic3.gov/Media/Y2023/PSA230314 ↑

4. https://cointelegraph.com/news/bitcoin-atm-firm-profited-from-crypto-scams-via-unlicensed-kiosks-secret-service ↑

5. https://www.gao.gov/assets/gao-22-105462.pdf ↑

SENATE THIRD READING

STR Bill Id:SB 401

Author:(Limón and Atkins)

As Amended Ver:September 8, 2023

Majority vote

SUMMARY

Provides for the regulation of digital financial asset transaction kiosks, often referred to as "crypto kiosks," including limits on the total amount of transactions in a day, fee limitations, and a requirement to provide a receipt for every transaction.

Major Provisions

1. Prohibits an operator of a digital financial asset transaction kiosk from the following:
   1. Accepting or dispensing more than $1,000 in a day from or to a customer.
   2. Beginning on or after January 1, 2025, collecting charges, whether direct or indirect, related to a single digital financial asset transaction that exceed the greater of the following:
      1. Five dollars ($5).
      2. 15% of the United States dollar equivalent of digital financial assets involved in the transaction, according to the publicly quoted market price of the digital financial asset on a licensed exchange at the time the customer initiates the transaction.
2. Requires an operator to do the following:
   1. Provide a receipt with specified information for any transaction made at a kiosk.
   2. Beginning on or after January 1, 2025, provide a customer with an in-language written disclosure, provided separately from other disclosures, regarding a transaction's terms and conditions prior to the transaction, as well as a receipt after the transaction
   3. Provide a list of all kiosk locations to the Department of Financial Protection and Innovation (DFPI), which DFPI shall make publicly available on its website.
3. Makes the entirety of this bill operative only if Assembly Bill 39 of the 2023-24 Regular Session is enacted and takes effect on or before January 1, 2024.
4. Defines "charges" as either fees or expenses paid by the customer or the difference between the current price of the digital financial asset on a licensed digital financial asset exchange and the price charged to the customer.

COMMENTS

A crypto kiosk, sometimes called a "crypto ATM," is a physical machine that looks similar to a traditional ATM and allows customers to purchase cryptocurrencies such as bitcoin. Crypto kiosks are usually "unidirectional," meaning they allow only for the purchase of crypto assets, while a small number are bidirectional, which allow for both the sale and purchase of crypto.

Kiosks can operate in different ways, and there is significant variety within the industry. Most often, the kiosk company will hold reserves of the available crypto and sell it directly to the consumer, and their revenues rely on transaction fees and charging higher-than-market prices. According to industry stakeholders, fees can reach as high as 30%, a rate that is much higher than mainstream online crypto exchanges.

The number of crypto kiosks has also grown considerably in recent years. According to data provided by the author's office, there are around 3,400 kiosks in California alone. Industry stakeholders report that consumers use these kiosks for a number of purposes, including for remittances and investments.

Since crypto kiosks first appeared in stores, their presence in restaurants, gas stations, and convenience stores has sparked a debate about their purpose and the potential for consumer harm. Crypto kiosks are commonly associated with criminal activity and fraud, law enforcement agencies continue to warn consumers about the emerging risks associated with crypto kiosks

Kiosks can also cause financial harm by making it easier for lower-information consumers to buy a risky, expensive, and volatile product that is under-regulated and heavily marketed. This concern is more fundamental to crypto itself: the industry has often been accused of taking advantage of retail traders or everyday people, whether it be through aggressive and misleading advertising, insider trading, or pump-and-dump or rug pull scams. Kiosks, which are typically located in stores and gas stations and look like a traditional ATM, may attract curious consumers who may not fully be aware of the risks. Given the typical kiosk's high fees and unidirectional design, it is possible unprepared consumers are paying up to 30% in fees on an investment that they may not fully understand or even know how exit.

This bill proposes a number of new rules around crypto kiosks located in California. These rules are meant to address issues around high costs, fraud, and criminal activity. Key provisions include:

1. Disclosures. This bill includes new disclosure requirements related to fees and "spread," which is the difference between what the kiosk user is paying for a crypto asset compared to the price listed on a licensed crypto exchange.
2. Fee cap. The author proposes a 15% cap beginning on January 1, 2025, on direct and indirect charges, including the spread, per transaction.
3. Transaction limit. This bill puts in place a $1,000 transaction limit per day. The goal of this cap is to mitigate harm from fraud or to otherwise deter criminal activity.
4. Location database. Under the bill, operators must provide DPFI a list of all kiosk locations, which DFPI will then make publicly available. According to the author, this is to help law enforcement take action against unregistered kiosks used for criminal activity.

According to the Author

"SB 401 establishes consumer protections for crypto kiosks to reduce fraud and other criminal activity and rein-in high mark-ups on crypto transactions. The bill mitigates the risk of transactions related to fraud and other criminal activity by limiting the amount of transactions to no more than $1,000 per customer per day. The bill also requires an operator of a crypto kiosk to provide a detailed receipt to a consumer with specified information about the transaction and caps the transaction fees that operators can charge to no more than $5 or 15% of the value of the transaction, whichever is greater."

Arguments in Support

The Consumer Federation of California writes:

"Proper regulation and consumer protections are vitally important when it comes to the arena of cryptocurrency, an extremely volatile area of financial mechanisms where a consumer's wellbeing can be on the line…crypto ATMs not only charge an enormous transaction fee for the purchase or sale of crypto assets, with fees typically adding 12%-25% to the purchase price of a crypto asset, but they also serve as hotbeds to cover up illicit activity…SB 401 seeks to reduce Californian's exposure to financial harm associated with crypto kiosks and for that reason we respectfully ask for your support and aye vote on this bill."

Arguments in Opposition

The Blockchain Advocacy Coalition, along with a number of industry stakeholders, writes in opposition:

"Cryptocurrency kiosks operate as convenient, fast, and familiar currency exchanges, allowing everyday people the opportunity to purchase or sell cryptocurrency at their local convenience stores, grocery stores, or bodegas.

SB 401 sets up a licensing regime for the industry, which will allow the CA Department of Financial Protection & Innovation to approve, audit, and collect information about all crypto kiosk operators in the state. This regime is welcomed by the industry and the consumers that use them. It will help create a statewide regulatory framework, increase protection for consumers, and help weed out bad actors. However, SB 401 also sets up an arbitrary fee cap and transaction limit amount, which given the capital costs of owning, installing, maintaining, and operating a crypto kiosk, would drive these machines out of our communities and out of the state."

FISCAL COMMENTS

According to the Assembly Appropriations Committee, ongoing costs of approximately $2.7 million to DFPI to provide oversight of DFA transaction kiosks (Financial Protection Fund). DFPI anticipates enforcement efforts will be similar to those undertaken in DFPI's existing licensure programs, necessitating multiple additional staff positions to establish relationships with operators and ensure compliance.

VOTES

SENATE FLOOR: 32-6-2

YES: Allen, Alvarado-Gil, Archuleta, Ashby, Atkins, Becker, Blakespear, Bradford, Caballero, Cortese, Dodd, Durazo, Eggman, Glazer, Gonzalez, Hurtado, Laird, Limón, McGuire, Menjivar, Min, Newman, Padilla, Portantino, Roth, Rubio, Skinner, Smallwood-Cuevas, Stern, Umberg, Wahab, Wiener

NO: Dahle, Grove, Jones, Niello, Ochoa Bogh, Wilk

ABS, ABST OR NV: Nguyen, Seyarto

ASM BANKING AND FINANCE: 8-3-1

YES: Grayson, Bauer-Kahan, Cervantes, Mike Fong, Petrie-Norris, Soria, Wicks, Wilson

NO: Chen, Dixon, Waldron

ABS, ABST OR NV: Gabriel

ASM APPROPRIATIONS: 11-4-1

YES: Holden, Bryan, Calderon, Wendy Carrillo, Mike Fong, Hart, Lowenthal, Papan, Pellerin, Weber, Wilson

NO: Megan Dahle, Dixon, Mathis, Sanchez

ABS, ABST OR NV: Soria

UPDATED

VERSION: September 8, 2023

CONSULTANT: Luke Reidenbach / B. & F. / (916) 319-3081 FN: 0002110

SENATE THIRD READING

STR Bill Id:SB 401

Author:(Limón and Atkins)

As Amended Ver:September 1, 2023

Majority vote

SUMMARY

Provides for the regulation of digital financial asset transaction kiosks, often referred to as "crypto kiosks," including limits on the total amount of transactions in a day, fee limitations, and a requirement to provide a receipt for every transaction.

Major Provisions

1. Prohibits an operator of a digital financial asset transaction kiosk from the following:
   1. Accepting or dispensing more than $1,000 in a day from or to a customer.
   2. Collecting charges, whether direct or indirect, related to a single digital financial asset transaction that exceed the greater of the following:
      1. Five dollars ($5).
      2. 10% of the United States dollar equivalent of digital financial assets involved in the transaction, according to the publicly quoted market price of the digital financial asset on a licensed exchange at the time the customer initiates the transaction.
2. Requires an operator to do the following:
   1. Provide an option for a customer to exchange any amount of a digital financial asset for fiat currency.
   2. Provide a receipt with specified information for any transaction made at a kiosk.
   3. Provide a customer with an in-language written disclosure, provided separately from other disclosures, regarding a transaction's terms and conditions prior to the transaction, as well as a receipt after the transaction
   4. Provide a list of all kiosk locations to the Department of Financial Protection and Innovation (DFPI), which DFPI shall make publicly available on its website.
3. Includes contingent enactment language in the event that AB 39 (Grayson) the current Legislative Session is chaptered, thereby incorporating SB 401's substantive provisions into AB 39's proposed licensing program.
4. Defines "charges" as either fees or expenses paid by the customer or the difference between the current price of the digital financial asset on a licensed digital financial asset exchange and the price charged to the customer.

COMMENTS

A crypto kiosk, sometimes called a "crypto ATM," is a physical machine that looks similar to a traditional ATM and allows customers to purchase cryptocurrencies such as bitcoin. Crypto kiosks are usually "unidirectional," meaning they allow only for the purchase of crypto assets, while a small number are bidirectional, which allow for both the sale and purchase of crypto.

Kiosks can operate in different ways, and there is significant variety within the industry. Most often, the kiosk company will hold reserves of the available crypto and sell it directly to the consumer, and their revenues rely on transaction fees and charging higher-than-market prices. According to industry stakeholders, fees can reach as high as 30%, a rate that is much higher than mainstream online crypto exchanges.

The number of crypto kiosks has also grown considerably in recent years. According to data provided by the author's office, there are around 3,400 kiosks in California alone. Industry stakeholders report that consumers use these kiosks for a number of purposes, including for remittances and investments.

Since crypto kiosks first appeared in stores, their presence in restaurants, gas stations, and convenience stores has sparked a debate about their purpose and the potential for consumer harm. Crypto kiosks are commonly associated with criminal activity and fraud, law enforcement agencies continue to warn consumers about the emerging risks associated with crypto kiosks

Kiosks can also cause financial harm by making it easier for lower-information consumers to buy a risky, expensive, and volatile product that is under-regulated and heavily marketed. This concern is more fundamental to crypto itself: the industry has often been accused of taking advantage of retail traders or everyday people, whether it be through aggressive and misleading advertising, insider trading, or pump-and-dump or rug pull scams. Kiosks, which are typically located in stores and gas stations and look like a traditional ATM, may attract curious consumers who may not fully be aware of the risks. Given the typical kiosk's high fees and unidirectional design, it is possible unprepared consumers are paying up to 30% in fees on an investment that they may not fully understand or even know how exit.

This bill proposes a number of new rules around crypto kiosks located in California. These rules are meant to address issues around high costs, fraud, and criminal activity. Key provisions include:

1. Disclosures. This bill includes new disclosure requirements related to fees and “spread,” which is the difference between what the kiosk user is paying for a crypto asset compared to the price listed on a licensed crypto exchange.
2. Fee cap. The author proposes a 10% cap on direct and indirect charges, including the spread, per transaction.
3. Transaction limit. This bill puts in place a $1,000 transaction limit per day. The goal of this cap is to mitigate harm from fraud or to otherwise deter criminal activity.
4. Location database. Under this bill, operators must provide DFPI a list of all kiosk locations, which DFPI will then make publicly available. According to the author, this is to help law enforcement take action against unregistered kiosks used for criminal activity.

According to the Author

"SB 401 establishes consumer protections for crypto kiosks to reduce fraud and other criminal activity and rein-in high mark-ups on crypto transactions. The bill mitigates the risk of transactions related to fraud and other criminal activity by limiting the amount of transactions to no more than $1,000 per customer per day. The bill also requires an operator of a crypto kiosk to provide a detailed receipt to a consumer with specified information about the transaction and caps the transaction fees that operators can charge to no more than $5 or 10% of the value of the transaction, whichever is greater."

Arguments in Support

The Consumer Federation of California writes:

"Proper regulation and consumer protections are vitally important when it comes to the arena of cryptocurrency, an extremely volatile area of financial mechanisms where a consumer's wellbeing can be on the line…crypto ATMs not only charge an enormous transaction fee for the purchase or sale of crypto assets, with fees typically adding 12%-25% to the purchase price of a crypto asset, but they also serve as hotbeds to cover up illicit activity…SB 401 seeks to reduce Californian's exposure to financial harm associated with crypto kiosks and for that reason we respectfully ask for your support and aye vote on this bill."

Arguments in Opposition

The Blockchain Advocacy Coalition, along with a number of industry stakeholders, writes in opposition:

"Cryptocurrency kiosks operate as convenient, fast, and familiar currency exchanges, allowing everyday people the opportunity to purchase or sell cryptocurrency at their local convenience stores, grocery stores, or bodegas.

SB 401 sets up a licensing regime for the industry, which will allow the CA Department of Financial Protection & Innovation to approve, audit, and collect information about all crypto kiosk operators in the state. This regime is welcomed by the industry and the consumers that use them. It will help create a statewide regulatory framework, increase protection for consumers, and help weed out bad actors. However, SB 401 also sets up an arbitrary fee cap and transaction limit amount, which given the capital costs of owning, installing, maintaining, and operating a crypto kiosk, would drive these machines out of our communities and out of the state."

FISCAL COMMENTS

According to the Assembly Appropriations Committee, ongoing costs of approximately $2.7 million to DFPI to provide oversight of DFA transaction kiosks (Financial Protection Fund). DFPI anticipates enforcement efforts will be similar to those undertaken in DFPI's existing licensure programs, necessitating multiple additional staff positions to establish relationships with operators and ensure compliance.

VOTES

SENATE FLOOR: 32-6-2

YES: Allen, Alvarado-Gil, Archuleta, Ashby, Atkins, Becker, Blakespear, Bradford, Caballero, Cortese, Dodd, Durazo, Eggman, Glazer, Gonzalez, Hurtado, Laird, Limón, McGuire, Menjivar, Min, Newman, Padilla, Portantino, Roth, Rubio, Skinner, Smallwood-Cuevas, Stern, Umberg, Wahab, Wiener

NO: Dahle, Grove, Jones, Niello, Ochoa Bogh, Wilk

ABS, ABST OR NV: Nguyen, Seyarto

ASM BANKING AND FINANCE: 8-3-1

YES: Grayson, Bauer-Kahan, Cervantes, Mike Fong, Petrie-Norris, Soria, Wicks, Wilson

NO: Chen, Dixon, Waldron

ABS, ABST OR NV: Gabriel

ASM APPROPRIATIONS: 11-4-1

YES: Holden, Bryan, Calderon, Wendy Carrillo, Mike Fong, Hart, Lowenthal, Papan, Pellerin, Weber, Wilson

NO: Megan Dahle, Dixon, Mathis, Sanchez

ABS, ABST OR NV: Soria

UPDATED

VERSION: September 1, 2023

CONSULTANT: Luke Reidenbach / B. & F. / (916) 319-3081 FN: 0001543

Date of Hearing: August 16, 2023

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Chris Holden, Chair

SBPCA Bill Id:SB 401

Author:(Limón) – As Amended Ver:July 12, 2023

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill provides for the regulation of digital financial asset (DFA) transaction kiosks by the Department of Financial Protection and Innovation (DFPI).

Specifically, this bill:

1. Prohibits a kiosk operator from accepting or dispensing more than $1,000 per day, from or to a resident via a kiosk, and collecting charges related to a single transaction in excess of $5, or 10% of the transaction value, whichever is greater.
2. Requires an operator to provide a resident with an in-language written disclosure regarding a transaction’s terms and conditions prior to the transaction, as well as a receipt after the transaction.
3. Requires an operator to provide DFPI with a list of all the operator’s in-state kiosk locations, which DFPI must make available on DFPI’s website.

FISCAL EFFECT:

Ongoing costs of approximately $2.7 million to DFPI to provide oversight of DFA transaction kiosks (Financial Protection Fund). DFPI anticipates enforcement efforts will be similar to those undertaken in DFPI’s existing licensure programs, necessitating multiple additional staff positions to establish relationships with operators and ensure compliance.

COMMENTS:

1. Purpose. According to the author, this bill “establishes consumer protections for crypto kiosks to reduce fraud and other criminal activity and rein-in high mark-ups on crypto transactions.”
2. Support and Opposition. This bill is supported by the Consumer Federation of California and the Older Women’s League, which argues kiosks “not only charge an enormous transaction fee for the purchase or sale of crypto assets, with fees typically adding 12%-25% to the purchase price of a crypto asset, but they also serve as hotbeds to cover up illicit activity.”

This bill is opposed by a coalition of crypto companies and business groups, including the Blockchain Advocacy Coalition, California Black Chamber of Commerce, and California Grocers Association, which argues “kiosks are already subject to rigorous fraud prevention and know-your-customer (KYC) regulations to protect consumers. However, the arbitrary regulations and limitations…would create a de-facto ban on cryptocurrency kiosks in California.”

1. Background.

DFA Regulatory Efforts. A DFA (also referred to as “cryptocurrency” or “crypto”) is a digital representation of value that is not issued or backed by a government or central bank. Unlike the dollar, a DFA, such as a bitcoin, is not considered legal tender, but private parties may agree that it is tender to facilitate an economic exchange.

The crypto industry has operated primarily outside of federal and state regulatory frameworks that apply to similar traditional financial products and services. While the federal Securities and Exchange Commission has ramped up enforcement against crypto companies for alleged violations of security laws, Congress is not near agreement on how to address crypto-related risks. As noted in the Assembly Banking and Finance Committee’s analysis of this bill, “the industry has often been accused of taking advantage of retail traders or everyday people, whether it be through aggressive and misleading advertising, insider trading, or pump-and-dump or rug pull scams.”

DFA Transaction Kiosks. A DFA transaction kiosk (also referred to as “crypto kiosk” or “crypto automated teller machine (ATM))” is a physical machine that looks similar to a traditional ATM. Although there is significant variety within the industry, most kiosk operators hold reserves of available crypto to sell directly to a consumer. A small number of kiosks are also bidirectional, also allowing a consumer to sell crypto to the operator. Revenues stem from transaction fees, which can reach as high as 30%, well above the rate charged by mainstream online crypto exchanges, with industry representatives arguing such fees reflect the higher costs of operating this physical business model. Overall, the number of kiosks has grown considerably in recent years, with approximately 3,400 kiosks in California, generally located in convenience stores, gas stations, and restaurants.

While industry critics argue kiosks are already clustering in immigrant communities as yet another form of predatory inclusion, industry representatives argue kiosks mostly serve high-information consumers who understand the risks. Absent more robust federal and state regulation of the crypto industry, this bill establishes rules for kiosk transactions, including a $1,000 transaction limit per day, 10% cap on fees per transaction, and fee disclosure requirements. However, this bill’s rules apply only to transactions involving a “resident,” as defined, with the exception of the transaction fee cap, which may complicate DFPI enforcement.

1. Related Legislation. AB 39 (Grayson) establishes, under DFPI, a licensing and regulatory framework for DFA business activity, including that of kiosk companies. AB 39 is pending hearing in the Senate Appropriations Committee.

Analysis Prepared by: Irene Ho / APPR. / (916) 319-2081

Date of Hearing: July 10, 2023

ASSEMBLY COMMITTEE ON BANKING AND FINANCE

Timothy Grayson, Chair

SBPCA Bill Id:SB 401

Author:(Limón) – As Amended Ver:June 19, 2023

SENATE VOTE: 32-6

SUBJECT: Digital financial asset transaction kiosks

SUMMARY: Provides for the regulation of digital financial asset transaction kiosks, including limits on the total amount of transactions in a day, fee limitations, and a requirement to provide a receipt for every transaction. Specifically, this bill:

1. Defines the following terms, among others:
   1. “Digital financial asset” means a digital representation of value that is used as a medium of exchange, unit of account, or store of value and that is not legal tender, whether or not denominated in legal tender.
   2. “Digital financial asset transaction kiosk” means an electronic information processing device that accepts or dispenses cash in exchange for a digital financial asset.
2. Prohibits an operator of a digital financial asset transaction kiosk from the following:
   1. Accepting or dispensing more than $1,000 in a day from or to a resident.
   2. Collecting charges, whether direct or indirect, related to a single digital financial asset transaction that exceed the greater of the following:
      1. Five dollars ($5).
      2. 10% of the United States dollar equivalent of digital financial assets involved in the transaction.
3. Requires an operator to do the following:
   1. Provide an option for a resident to exchange any amount of a digital financial asset for fiat currency.
   2. Provide a receipt with specified information for any transaction made at a kiosk.
   3. Provide a list of all kiosk locations to DFPI, which DFPI shall make publicly available on its website.

EXISTING LAW:

1. Establishes the Department of Financial Protection and Innovation (DFPI) as the state agency responsible for licensing, regulating, and supervising a range of financial services companies that provide products or services to California consumers, including but not limited to, securities issuers, broker-dealers, investment advisers, and investment advisers representatives; persons offering or selling off-exchange commodities; persons holding securities as custodians on behalf of securities owners; money transmitters; and persons offering or providing consumer financial products or services. (Financial Code Section 300)
2. Provides the California Consumer Financial Protection Law (CCFPL), which authorizes DFPI to take enforcement action against a person that engages in an unlawful, unfair, deceptive, or abusive act or practice with respect to consumer financial products or services. (Division 24 of the Financial Code, commencing with section 90000)

FISCAL EFFECT: Unknown. This bill is keyed Fiscal by Legislative Counsel.

COMMENTS:

1. Purpose.

According to the author:

SB 401 establishes consumer protections for crypto kiosks to reduce fraud and other criminal activity and rein-in high mark-ups on crypto transactions. The bill mitigates the risk of transactions related to fraud and other criminal activity by limiting the amount of transactions to no more than $1,000 per customer per day. The bill also requires an operator of a crypto kiosk to provide a detailed receipt to a consumer with specified information about the transaction and caps the transaction fees that operators can charge to no more than $5 or 10% of the value of the transaction, whichever is greater.

1. Background

A digital financial asset (also referred to as “crypto,” “cryptocurrency,” a “crypto asset,” or “virtual currency,” terms used interchangeably in this analysis) is a digital representation of value that is not issued or backed by a government or central bank. Unlike the dollar, cryptocurrency is not considered legal tender, but private parties may agree to it to facilitate an economic exchange. Bitcoin, the most well-known virtual currency, and many other virtual currencies are created and tracked via a decentralized protocol, rather than the centralized issuance model that prevails in the world of fiat money.

The most commonly used technology that produces and supports virtual currency is distributed ledger technology, which is a decentralized database managed by multiple parties within a network. Blockchain is the most well-known type of distributed ledger technology and supports Bitcoin and many other types of virtual currencies on the market today. Blockchain also enables decentralized finance (DeFi), which is an effort to replicate traditional finance systems through the use of blockchain-enabled contracts. DeFi is built on one of a dozen or so blockchains, including Ethereum, and DeFi applications allow cryptocurrency holders to lend or borrow from other users and engage in other financial activities, such as entering into derivative markets.

Cryptocurrency and DeFi proponents believe that these products and systems are viable alternatives to those found in the traditional financial system. They argue that cryptocurrency is beneficial because it is decentralized, allows peer-to-peer transactions, makes transactions easy and fast, diversifies portfolios, acts as an inflation hedge, encourages cross-border payments, promotes financial inclusion, and provides transactional freedom.

1. Is cryptocurrency money?

As cryptocurrency has grown from a small group of early adopters and hobbyists into a trillion dollar market, a lingering question has been: how should policymakers classify cryptocurrency and regulate it?

There is doubt that cryptocurrency, as it works today, could work well as money. First, as a matter of definition, cryptocurrency is not issued by a central government, and there is no obligation for the government to accept it. Moreover, as a practical matter, it remains doubtful that cryptocurrency could be a viable privately-issued legal tender or facilitate everyday payments. Cryptocurrency can function as a unit of account, a store of value, and a medium of exchange, three necessary features of money. But, unlike most fiat currencies, cryptocurrency also appears to be highly vulnerable to confidence shocks, fraud, and price instability, and consumers must navigate a host of technological and practical obstacles when using it. These are not desirable features of money.

Moreover, many buyers of cryptocurrencies use these digital assets to engage in speculative investment activities or other types of financial services activities rather than facilitating payments and conducting everyday transactions. Most cryptocurrency trading happening today treats it as an asset class – a group of investments with particular characteristics – owned for purposes other than payments for goods and services.

1. Crypto kiosks

A crypto kiosk, sometimes called a “crypto ATM,” is a physical machine that looks similar to a traditional ATM and allows customers to purchase cryptocurrencies such as bitcoin. Crypto kiosks are usually “unidirectional,” meaning they allow only for the purchase of crypto assets, while a small number are bidirectional, which allow for both the sale and purchase of crypto.

Example of a crypto kiosk^[1]

Kiosks can operate in different ways, and there is significant variety within the industry. Most often, the kiosk company will hold reserves of the available crypto and sell it directly to the consumer, and their revenues rely on transaction fees and charging higher-than-market prices. According to industry stakeholders, fees can reach as high as 30%, a rate that is much higher than mainstream online crypto exchanges.

The number of crypto kiosks has also grown considerably in recent years. According to data provided by the author’s office, there are around 3,400 kiosks in California alone. Industry stakeholders report that consumers use these kiosks for a number of purposes, including for remittances and investments.

1. What are the problems with crypto kiosks?

Since crypto kiosks first appeared in stores, their presence in restaurants, gas stations, and convenience stores has sparked a debate about their purpose and the potential for consumer harm. A June 2022 Politico report summarizes the concerns from federal and state regulators as follows:

The regulators worry that crypto ATMs can too neatly serve the interests of money launderers and fraudsters, or could hide payments to sex and drug traffickers; even for honest brokers, their fees are considerably higher than normal bank transactions. They also market themselves, sometimes aggressively, to low-income people who may not understand the risks of moving their money into cryptocurrency, which is currently in the midst of one of its intermittent crashes.^[2]

Crypto kiosks are commonly associated with criminal activity and fraud, but industry stakeholders push back against accusations that these machines primary act as a conduit for these types of transactions. The Blockchain Advocacy Coalition states in its letter that these machines “have the lowest case of fraud – amounting to only 1% of all fraudulent activities in the [crypto] sector,” citing a 2023 Chainanalysis report of crypto-related crime. Moreover, opposition groups argue the industry itself has taken significant strides in addressing these issues, including introducing new protections and controls.

Nevertheless, law enforcement agencies continue to warn consumers about the emerging risks associated with crypto kiosks. For example, in 2022 the Federal Bureau of Investigation (FBI) issued an alert related to so-called “pig butchering” scams, where scammers pose as a friend or romantic partner to steal money from a victim, and in the alert the FBI acknowledges these scams most often occur through wire transfers and prepaid cards. However, the Bureau notes “the use of cryptocurrency and cryptocurrency ATMs is also an emerging method of payment. Individual losses related to these schemes ranged from tens of thousands of to millions of dollars.”^[3]

Kiosks can also cause financial harm by making it easier for lower-information consumers to buy a risky, expensive, and volatile product that is under-regulated and heavily marketed. This concern is more fundamental to crypto itself: the industry has often been accused of taking advantage of retail traders or everyday people, whether it be through aggressive and misleading advertising, insider trading, or pump-and-dump or rug pull scams. Kiosks, which are typically located in stores and gas stations and look like a traditional ATM, may attract curious consumers who may not fully be aware of the risks. Given the typical kiosk’s high fees and unidirectional design, it is possible unprepared consumers are paying up to 30% in fees on an investment that they may not fully understand or even know how to get out of.

There is a very good reason to be concerned about who all is purchasing crypto from kiosks. Crypto is often marketed as a path toward financial inclusion through the democratization of finance, but some scholars argue that crypto is yet another form of “predatory inclusion.” Predatory inclusion occurs when marginalized communities gain access to goods they were historically excluded from, but this new access comes with conditions that actually worsen financial insecurity. As the Brookings Institution’s Tonantzin Carmona explains, new financial products are often advertised as serving the unserved, such as when payday loans were once described as a way to “democratize” credit. Carmona makes a thorough case that crypto, and crypto kiosks, are a part of that legacy, as she writes:

Indeed, just as we see check cashing and payday lender storefronts concentrated in Black, Latino or Hispanic, and immigrant communities, we are soon likely to see bitcoin ATMs in Latino or Hispanic grocery stores, according to recent crypto industry announcements. In major metropolitan areas such as Miami, Dallas-Fort Worth, and Los Angeles, bitcoin ATMs are already clustering in Salvadoran, Colombian, and Mexican neighborhoods. These ATMs are notorious for charging high fees, ranging from 7% to 20% per transaction.^[4]

In response to these concerns, industry stakeholders argue these machines mostly serve high-information customers who understand the risks. They point to the relatively low volume of transaction activity for each machine as an indication that rather than hoovering up the limited discretionary income of vulnerable consumers walking in the door, these machines instead cater to a smaller number of informed consumers who seek the convenience and personal independence granted by kiosks.

1. What this bill does

SB 401 proposes a number of new rules around crypto kiosks located in California. These rules are meant to address issues around high costs, fraud, and criminal activity. Key provisions include:

• Fee cap. The author proposes a 10% cap on direct and indirect fees per transaction. The author recently amended the bill to increase the cap from 2%.
• Transaction limit. SB 401 puts in place a $1,000 transaction limit per day. The goal of this cap is to mitigate harm from fraud or to otherwise deter criminal activity.
• Disclosures. This bill includes new disclosure requirements related to fees and “spread,” which is the difference between what the kiosk user is paying for a crypto saset compared to the price listed on a major crypto exchange.
• Location database. Under the bill, operators must provide DPFI a list of all kiosk locations, which DFPI will then make publicly available. According to the author, this is to help law enforcement take action against unregistered kiosks used for criminal activity.

1. Interaction with AB 39

AB 39 (Grayson), of the 2023-24 Legislative Session, which is currently pending in the Senate Committee on Banking and Financial Institutions, would establish a licensure program for crypto companies, including kiosk companies, that are buying, selling, and exchanging crypto on behalf of California residents. Given this overlap, the authors may want to review the proposals and consider combining them or otherwise more closely aligning them.

1. Support

Consumer Federation of California and Older Women’s League (OWL) Sacramento Capitol write in support:

Proper regulation and consumer protections are vitally important when it comes to the arena of cryptocurrency, an extremely volatile area of financial mechanisms where a consumer’s wellbeing can be on the line…crypto ATMs not only charge an enormous transaction fee for the purchase or sale of crypto assets, with fees typically adding 12%-25% to the purchase price of a crypto asset, but they also serve as hotbeds to cover up illicit activity…SB 401 seeks to reduce Californian’s exposure to financial harm associated with crypto kiosks and for that reason we respectfully ask for your support and aye vote on this bill.

1. Opposition

A coalition of kiosk companies oppose SB 401. These companies argue the proposed fee cap and transaction limit will make the business model unworkable. Their letter states:

However, SB 401 also sets up an arbitrary fee cap and transaction limit amount, which given the capital costs of owning, installing, maintaining, and operating a crypto kiosk, would drive these machines out of our communities and out of the state.

The most considerable expense of owning and operating a crypto kiosk is the rent an operator pays to house the machine at a local retail business. The monthly rent can be anywhere between $300-$700 per month, a significant income to many small, frequently minority-owned retail businesses across California. This income equates to over $21 million in rent payments to small business retailers alone. In addition to the direct benefit of rental income to retailers, the kiosks generate increased foot traffic and purchases while the customer visits the location.

The Blockchain Advocacy Coalition opposes SB 401 unless amended. Like other opposition groups, the coalition is requesting the fee cap and transaction limits be removed.

1. Further discussion of the fee cap and transaction limit.

As noted above, opponents argue the 10% fee cap (which the author recently increased from 2%) and the $1,000 transaction limit will make the kiosk business model unworkable and will result in the kiosk industry leaving California.

The discussion around fee caps is challenging because the fees charged by some operators are difficult to defend. Fees can be as high as 30%, which means that a customer pays $300 for a $1,000 transaction. Industry stakeholders argue these fees reflect the costs of running the business, and business costs are high because the industry is still in its infancy. As the industry matures and the infrastructure is further developed, the argument goes, costs will come down, allowing for lower fees for kiosk customers. There may be merit to this argument, but it is also worth noting the first kiosk was deployed nearly 10 years ago, and at a certain point the industry can no longer reasonably describe itself as “nascent.” It is unclear just how much longer the Legislature should wait before applying warranted regulations, especially given concerns of where these machines are placed and the consumers targeted. Nevertheless, the fee cap will undoubtedly require changes within the kiosk industry, and the author may wish to consider delaying the 10% fee cap or phasing it in over a period of time to give companies time to adjust.

The transaction limit is also a source of frustration for kiosk companies. This limit is intended to mitigate fraud, but opponents contend fraud is relatively rare and kiosk companies must follow strict policies related to the Bank Secrecy Act and Anti-Money Laundering (AML). The author may wish to consider modifying the transaction limit to allow for a higher limit for long-established customers, thereby allowing these kiosks to serve those repeat customers who tend to make large but legitimate transactions.

1. Amendments

The committee recommends the following amendments to clarify definitions and bolster disclosures to kiosk customers.

• Amend Section 3901(c) as follows:

(c) (1) “Digital financial asset transaction kiosk” means an electronic information processing device that accepts or dispenses is capable of accepting or dispensing cash in exchange for a digital financial asset.

(2) As used in this section, “cash” means physical United States currency, both coins and paper currency

• Amend Section 3905 by inserting a new (a) and reordering the section as necessary:

3905. (a) Before a digital financial asset transaction, an operator shall provide a written disclosure in English and in the same language principally used by the operator to advertise, solicit, or negotiate with a resident containing the terms and conditions of the transaction, which shall include, at a minimum, all of the following:

(1) The amount of a digital financial asset involved in the transaction.

(2) The amount, in United States dollars, of any fees, expenses, and charges collected by the operator.

(3) The United States dollar price of the digital financial asset that is charged to the customer and the United States dollar price of the digital financial asset as listed by a major digital financial asset platform.

(4) If an operator does not provide any method to reverse or refund a transaction, then a warning that all transactions are final and cannot be undone.

(b)  An operator shall provide a resident with a receipt for any transaction made at the operator’s digital financial asset transaction kiosk…

REGISTERED SUPPORT / OPPOSITION:

Support

Consumer Federation of California
Older Women's League Sacramento Capitol

Oppose

American Petroleum and Convenience Store Association
Athena Bitcoin
ATM Industry Association
Bitcoindepot
BitMachina
Bitstop
Budget Coinz
Cal Asian Chamber of Commerce
California Black Chamber of Commerce
California Fuels and Convenience Alliance
California Grocers Association
California Hispanic Chamber of Commerce
Cash2Bitcoin
Coin Time
CoinFlip
General Bytes
Genesis Coin
InstaBitaATM
Kiosk Manufacturer Association
National Bitcoin ATM
PowerCoin
RockitCoin

Oppose Unless Amended

Blockchain Advocacy Coalition
Just Digital

Analysis Prepared by: Luke Reidenbach / B. & F. / (916) 319-3081

1. Source: https://kiosk.com/applications/bitcoin-atm/. ↑

2. https://www.politico.com/news/magazine/2022/07/06/bitcoin-atms-regulations-00035083 ↑

3. https://cointelegraph.com/news/crypto-atms-emerging-as-popular-method-for-crypto-scam-payments-fbi ↑

4. https://www.brookings.edu/research/debunking-the-narratives-about-cryptocurrency-and-financial-inclusion/ ↑

Date of Hearing: June 26, 2023

ASSEMBLY COMMITTEE ON BANKING AND FINANCE

Timothy Grayson, Chair

SBPCA Bill Id:SB 401

Author:(Limón) – As Amended Ver:June 19, 2023

SENATE VOTE: 32-6

SUBJECT: Digital financial asset transaction kiosks

SUMMARY: Provides for the regulation of digital financial asset transaction kiosks, including limits on the total amount of transactions in a day, fee limitations, and a requirement to provide a receipt for every transaction. Specifically, this bill:

1. Defines the following terms, among others:
   1. “Digital financial asset” means a digital representation of value that is used as a medium of exchange, unit of account, or store of value and that is not legal tender, whether or not denominated in legal tender.
   2. “Digital financial asset transaction kiosk” means an electronic information processing device that accepts or dispenses cash in exchange for a digital financial asset.
2. Prohibits an operator of a digital financial asset transaction kiosk from the following:
   1. Accepting or dispensing more than $1,000 in a day from or to a resident.
   2. Collecting charges, whether direct or indirect, related to a single digital financial asset transaction that exceed the greater of the following:
      1. Five dollars ($5).
      2. 10% of the United States dollar equivalent of digital financial assets involved in the transaction.
3. Requires an operator to do the following:
   1. Provide an option for a resident to exchange any amount of a digital financial asset for fiat currency.
   2. Provide a receipt with specified information for any transaction made at a kiosk.
   3. Provide a list of all kiosk locations to DFPI, which DFPI shall make publicly available on its website.

EXISTING LAW:

1. Establishes the Department of Financial Protection and Innovation (DFPI) as the state agency responsible for licensing, regulating, and supervising a range of financial services companies that provide products or services to California consumers, including but not limited to, securities issuers, broker-dealers, investment advisers, and investment advisers representatives; persons offering or selling off-exchange commodities; persons holding securities as custodians on behalf of securities owners; money transmitters; and persons offering or providing consumer financial products or services. (Financial Code Section 300)
2. Provides the California Consumer Financial Protection Law (CCFPL), which authorizes DFPI to take enforcement action against a person that engages in an unlawful, unfair, deceptive, or abusive act or practice with respect to consumer financial products or services. (Division 24 of the Financial Code, commencing with section 90000)

FISCAL EFFECT: Unknown. This bill is keyed Fiscal by Legislative Counsel

COMMENTS:

1. Purpose.

According to the author:

SB 401 establishes consumer protections for crypto kiosks to reduce fraud and other criminal activity and rein-in high mark-ups on crypto transactions. The bill mitigates the risk of transactions related to fraud and other criminal activity by limiting the amount of transactions to no more than $1,000 per customer per day. The bill also requires an operator of a crypto kiosk to provide a detailed receipt to a consumer with specified information about the transaction and caps the transaction fees that operators can charge to no more than $5 or 10% of the value of the transaction, whichever is greater.

1. Background

A digital financial asset (also referred to as “crypto,” “cryptocurrency,” a “crypto asset,” or “virtual currency,” terms used interchangeably in this analysis) is a digital representation of value that is not issued or backed by a government or central bank. Unlike the dollar, cryptocurrency is not considered legal tender, but private parties may agree to it to facilitate an economic exchange. Bitcoin, the most well-known virtual currency, and many other virtual currencies are created and tracked via a decentralized protocol, rather than the centralized issuance model that prevails in the world of fiat money.

The most commonly used technology that produces and supports virtual currency is distributed ledger technology, which is a decentralized database managed by multiple parties within a network. Blockchain is the most well-known type of distributed ledger technology and supports Bitcoin and many other types of virtual currencies on the market today. Blockchain also enables decentralized finance (DeFi), which is an effort to replicate traditional finance systems through the use of blockchain-enabled contracts. DeFi is built on one of a dozen or so blockchains, including Ethereum, and DeFi applications allow cryptocurrency holders to lend or borrow from other users and engage in other financial activities, such as entering into derivative markets.

Cryptocurrency and DeFi proponents believe that these products and systems are viable alternatives to those found in the traditional financial system. They argue that cryptocurrency is beneficial because it is decentralized, allows peer-to-peer transactions, makes transactions easy and fast, diversifies portfolios, acts as an inflation hedge, encourages cross-border payments, promotes financial inclusion, and provides transactional freedom.

1. Is cryptocurrency money?

As cryptocurrency has grown from a small group of early adopters and hobbyists into a trillion dollar market, a lingering question has been: how should policymakers classify cryptocurrency and regulate it?

There is doubt that cryptocurrency, as it works today, could work well as money. First, as a matter of definition, cryptocurrency is not issued by a central government, and there is no obligation for the government to accept it. Moreover, as a practical matter, it remains doubtful that cryptocurrency could be a viable privately-issued legal tender or facilitate everyday payments. Cryptocurrency can function as a unit of account, a store of value, and a medium of exchange, three necessary features of money. But, unlike most fiat currencies, cryptocurrency also appears to be highly vulnerable to confidence shocks, fraud, and price instability, and consumers must navigate a host of technological and practical obstacles when using it. These are not desirable features of money.

Moreover, many buyers of cryptocurrencies use these digital assets to engage in speculative investment activities or other types of financial services activities rather than facilitating payments and conducting everyday transactions. Most cryptocurrency trading happening today treats it as an asset class – a group of investments with particular characteristics – owned for purposes other than payments for goods and services.

1. Crypto kiosks

A crypto kiosk, sometimes called a “crypto ATM,” is a physical machine that looks similar to a traditional ATM and allows customers to purchase cryptocurrencies such as bitcoin. Crypto kiosks are usually “unidirectional,” meaning they allow only for the purchase of crypto assets, while a small number are bidirectional, which allow for both the sale and purchase of crypto.

Example of a crypto kiosk^[1]

Kiosks can operate in different ways, and there is significant variety within the industry. Most often, the kiosk company will hold reserves of the available crypto and sell it directly to the consumer, and their revenues rely on transaction fees and charging higher-than-market prices. According to industry stakeholders, fees can reach as high as 30%, a rate that is much higher than mainstream online crypto exchanges.

The number of crypto kiosks has also grown considerably in recent years. According to data provided by the author’s office, there are around 3,400 kiosks in California alone. Industry stakeholders report that consumers use these kiosks for a number of purposes, including for remittances and investments.

1. What are the problems with crypto kiosks?

Since crypto kiosks first appeared in stores, their presence in restaurants, gas stations, and convenience stores has sparked a debate about their purpose and the potential for consumer harm. A June 2022 Politico report summarizes the concerns from federal and state regulators as follows:

The regulators worry that crypto ATMs can too neatly serve the interests of money launderers and fraudsters, or could hide payments to sex and drug traffickers; even for honest brokers, their fees are considerably higher than normal bank transactions. They also market themselves, sometimes aggressively, to low-income people who may not understand the risks of moving their money into cryptocurrency, which is currently in the midst of one of its intermittent crashes.^[2]

Crypto kiosks are commonly associated with criminal activity and fraud, but industry stakeholders push back against accusations that these machines primary act as a conduit for these types of transactions. The Blockchain Advocacy Coalition states in its letter that these machines “have the lowest case of fraud – amounting to only 1% of all fraudulent activities in the [crypto] sector,” citing a 2023 Chainanalysis report of crypto-related crime. Moreover, opposition groups argue the industry itself has taken significant strides in addressing these issues, including introducing new protections and controls.

Nevertheless, law enforcement agencies continue to warn consumers about the emerging risks associated with crypto kiosks. For example, in 2022 the Federal Bureau of Investigation (FBI) issued an alert related to so-called “pig butchering” scams, where scammers pose as a friend or romantic partner to steal money from a victim, and in the alert the FBI acknowledges these scams most often occur through wire transfers and prepaid cards. However, the Bureau notes “the use of cryptocurrency and cryptocurrency ATMs is also an emerging method of payment. Individual losses related to these schemes ranged from tens of thousands of to millions of dollars.”^[3]

Kiosks can also cause financial harm by making it easier for lower-information consumers to buy a risky, expensive, and volatile product that is under-regulated and heavily marketed. This concern is more fundamental to crypto itself: the industry has often been accused of taking advantage of retail traders or everyday people, whether it be through aggressive and misleading advertising, insider trading, or pump-and-dump or rug pull scams. Kiosks, which are typically located in stores and gas stations and look like a traditional ATM, may attract curious consumers who may not fully be aware of the risks. Given the typical kiosk’s high fees and unidirectional design, it is possible unprepared consumers are paying up to 30% in fees on an investment that they may not fully understand or even know how to get out of.

There is a very good reason to be concerned about who all is purchasing crypto from kiosks. Crypto is often marketed as a path toward financial inclusion through the democratization of finance, but some scholars argue that crypto is yet another form of “predatory inclusion.” Predatory inclusion occurs when marginalized communities gain access to goods they were historically excluded from, but this new access comes with conditions that actually worsen financial insecurity. As the Brookings Institution’s Tonantzin Carmona explains, new financial products are often advertised as serving the unserved, such as when payday loans were once described as a way to “democratize” credit. Carmona makes a thorough case that crypto, and crypto kiosks, are a part of that legacy, as she writes:

Indeed, just as we see check cashing and payday lender storefronts concentrated in Black, Latino or Hispanic, and immigrant communities, we are soon likely to see bitcoin ATMs in Latino or Hispanic grocery stores, according to recent crypto industry announcements. In major metropolitan areas such as Miami, Dallas-Fort Worth, and Los Angeles, bitcoin ATMs are already clustering in Salvadoran, Colombian, and Mexican neighborhoods. These ATMs are notorious for charging high fees, ranging from 7% to 20% per transaction.^[4]

In response to these concerns, industry stakeholders argue these machines mostly serve high-information customers who understand the risks. They point to the relatively low volume of transaction activity for each machine as an indication that rather than hoovering up the limited discretionary income of vulnerable consumers walking in the door, these machines instead cater to a smaller number of informed consumers who seek the convenience and personal independence granted by kiosks.

1. What this bill does

SB 401 proposes a number of new rules around crypto kiosks located in California. These rules are meant to address issues around high costs, fraud, and criminal activity. Key provisions include:

• Fee cap. The author proposes a 10% cap on direct and indirect fees per transaction. The author recently amended the bill to increase the cap from 2%.
• Transaction limit. SB 401 puts in place a $1,000 transaction limit per day. The goal of this cap is to mitigate harm from fraud or to otherwise deter criminal activity.
• Disclosures. This bill includes new disclosure requirements related to fees and “spread,” which is the difference between what the kiosk user is paying for a crypto saset compared to the price listed on a major crypto exchange.
• Location database. Under the bill, operators must provide DPFI a list of all kiosk locations, which DFPI will then make publicly available. According to the author, this is to help law enforcement take action against unregistered kiosks used for criminal activity.

1. Interaction with AB 39

AB 39 (Grayson), of the 2023-24 Legislative Session, which is currently pending in the Senate Committee on Banking and Financial Institutions, would establish a licensure program for crypto companies, including kiosk companies, that are buying, selling, and exchanging crypto on behalf of California residents. Given this overlap, the authors may want to review the proposals and consider combining them or otherwise more closely aligning them.

1. Support

Consumer Federation of California and Older Women’s League (OWL) Sacramento Capitol write in support:

Proper regulation and consumer protections are vitally important when it comes to the arena of cryptocurrency, an extremely volatile area of financial mechanisms where a consumer’s wellbeing can be on the line…crypto ATMs not only charge an enormous transaction fee for the purchase or sale of crypto assets, with fees typically adding 12%-25% to the purchase price of a crypto asset, but they also serve as hotbeds to cover up illicit activity…SB 401 seeks to reduce Californian’s exposure to financial harm associated with crypto kiosks and for that reason we respectfully ask for your support and aye vote on this bill.

1. Opposition

A coalition of kiosk companies oppose SB 401. These companies support some of SB 401’s provisions, but they argue the proposed fee cap and transaction limit will make the business model unworkable. Their letter states:

However, SB 401 also sets up an arbitrary fee cap and transaction limit amount, which given the capital costs of owning, installing, maintaining, and operating a crypto kiosk, would drive these machines out of our communities and out of the state.

The most considerable expense of owning and operating a crypto kiosk is the rent an operator pays to house the machine at a local retail business. The monthly rent can be anywhere between $300-$700 per month, a significant income to many small, frequently minority-owned retail businesses across California. This income equates to over $21 million in rent payments to small business retailers alone. In addition to the direct benefit of rental income to retailers, the kiosks generate increased foot traffic and purchases while the customer visits the location.

The Blockchain Advocacy Coalition opposes SB 401 unless amended. Like other opposition groups, the coalition is requesting the fee cap and transaction limits be removed. .

REGISTERED SUPPORT / OPPOSITION:

Support

Consumer Federation of California
Older Women's League Sacramento Capitol

Oppose

American Petroleum and Convenience Store Association
Athena Bitcoin
ATM Industry Association
Bitcoindepot
BitMachina
Bitstop
Budget Coinz
Cal Asian Chamber of Commerce
California Black Chamber of Commerce
California Fuels and Convenience Alliance
California Grocers Association
California Hispanic Chamber of Commerce
Cash2Bitcoin
Coin Time
CoinFlip
General Bytes
Genesis Coin
InstaBitaATM
Kiosk Manufacturer Association
National Bitcoin ATM
PowerCoin
RockitCoin

Oppose Unless Amended

Blockchain Advocacy Coalition
Just Digital

Analysis Prepared by: Luke Reidenbach / B. & F. / (916) 319-3081

1. Source: https://kiosk.com/applications/bitcoin-atm/. ↑

2. https://www.politico.com/news/magazine/2022/07/06/bitcoin-atms-regulations-00035083 ↑

3. https://cointelegraph.com/news/crypto-atms-emerging-as-popular-method-for-crypto-scam-payments-fbi ↑

4. https://www.brookings.edu/research/debunking-the-narratives-about-cryptocurrency-and-financial-inclusion/ ↑

 THIRD READING  

Bill No: SB 401

Author: Limón (D) and Atkins (D)

Introduced: 2/9/23

Vote: 21

SENATE BANKING & F.I. COMMITTEE: 5-0, 3/29/23

AYES: Limón, Bradford, Caballero, Min, Portantino

NO VOTE RECORDED: Niello, Nguyen

SENATE APPROPRIATIONS COMMITTEE: 5-1, 5/18/23

AYES: Portantino, Ashby, Bradford, Wahab, Wiener

NOES: Jones

NO VOTE RECORDED: Seyarto

SUBJECT: Digital financial asset transaction kiosks

SOURCE: Author

DIGEST:

This bill provides for the regulation of digital financial asset transaction kiosks, including limits on the total amount of transactions in a day, fee limitations, and a requirement to provide a receipt for every transaction.

ANALYSIS:

Existing law:

1. Establishes the Department of Financial Protection and Innovation (DFPI) as the state agency responsible for licensing, regulating, and supervising a range of entities that provide financial products or services to California consumers, including but not limited to, securities issuers, broker-dealers, investment advisers, and investment advisers representatives; persons offering or selling off-exchange commodities; persons holding securities as custodians on behalf of securities owners; money transmitters; and persons offering or providing consumer financial products or services. (Financial Code Section 300)
2. Provides the California Consumer Financial Protection Law (CCFPL), which authorizes DFPI to take enforcement action against a person that engages in an unlawful, unfair, deceptive, or abusive act or practice with respect to consumer financial products or services. (Division 24 of the Financial Code, commencing with section 90000)

This bill:

1. Defines the following terms, among others:
   1. “Digital financial asset” means a digital representation of value that is used as a medium of exchange, unit of account, or store of value and that is not legal tender, whether or not denominated in legal tender.
   2. “Digital financial asset transaction kiosk” means an electronic information processing device that accepts or dispenses cash in exchange for a digital financial asset.
2. Prohibits an operator of a digital financial asset transaction kiosk from the following:
   1. Accepting or dispensing more than $1,000 in a day from or to a resident.
      1. Collecting charges, whether direct or indirect, related to a single digital financial asset transaction that exceed the greater of five dollars ($5) or two percent of the United States dollar equivalent of digital financial assets involved in the transaction.
3. Requires an operator to do the following:
   1. Provide an option for a resident to exchange any amount of a digital financial asset for fiat currency.
   2. Provide a receipt with specified information for any transaction made at a kiosk.
   3. Provide a list of all kiosk locations to DFPI, which DFPI shall make publicly available on its website.

Comments

According to the author:

SB 401 establishes consumer protections for crypto kiosks to reduce fraud and other criminal activity and rein-in high mark-ups on crypto transactions. The bill mitigates the risk of transactions related to fraud and other criminal activity by limiting the amount of transactions to no more than $1,000 per customer per day. The bill also requires an operator of a crypto kiosk to provide a detailed receipt to a consumer with specified information about the transaction and caps the transaction fees that operators can charge to no more than $5 or 2% of the value of the transaction, whichever is greater.

Background

A digital financial asset transaction kiosk (more colloquially known as a “crypto kiosk”) is a physical machine that allows a consumer to buy and sell crypto assets, like bitcoin or ether, using cash, debit or credit card, or bank transfer. Crypto kiosks are often found in grocery, convenience, or liquor stores, and generally target consumers who are less technologically savvy and less knowledgeable about crypto markets than consumers who purchase crypto assets on online and mobile platforms, such as Coinbase and Kraken.

Operators of crypto kiosks are not subject to any state oversight or regulation of their business practices. The Department of Financial Protection and Innovation has not deemed crypto assets as “money” under state money transmission laws, and California has yet to enact a regulatory framework for crypto-related business activities. Under federal law, operators must comply with laws designed to combat money laundering and terrorist financing, but consumers in California enjoy no legal protections designed to protect their financial interests when transacting at crypto kiosks. According to Coin ATM Radar, there are over 3,300 crypto kiosks operating in California.^[1]

1. What is the Point of Crypto Kiosks?

Proponents of crypto kiosks are fundamentally believers in the value of crypto assets and see crypto kiosks as a user-friendly entry point for certain consumer segments to engage in crypto markets. Crypto adherents tout a variety of arguments to support the value of crypto assets, including the ability to transact digitally in more private and relatively faster means than some services in the traditional financial system. Others see crypto as an alternative asset class that has the potential to generate high returns over a short period of time. As a whole, the crypto industry appears to cater more towards the latter group of speculators, rather than the former group who see crypto as an alternative payment mechanism.

Crypto kiosks are designed to serve the “crypto curious” consumer, rather than the highly informed and digitally savvy consumer. Many users of crypto assets have sufficient knowledge and comfort to navigate the predominantly digital environments through which crypto assets are sold, transferred, and stored. This knowledgeable segment of users would rarely, if ever, interact with a crypto kiosk due to the high fees and limited user experience provided by kiosks, compared to online-only alternatives. Instead, operators of crypto kiosks target potential customers who have relatively little information about crypto markets but have maybe heard of a friend or relative who has made money speculating in crypto. Hence, the business model of crypto kiosk operators appears to be placing kiosks in areas where all people frequent, like grocery and convenience stores, hoping to attract the curious customer who can purchase crypto assets upon providing a few taps and inputs on the kiosk screen.

Skeptics of the crypto industry see crypto kiosks as an extractive on-ramp into an ecosystem rooted in speculative and gambling-like behavior. These critics question whether there is any value in providing more access points for consumers to purchase crypto assets that contain no legal claim to underlying assets or cash flows. The Biden administration released its Economic Report of the President on March 20, 2023, which includes an entire chapter on crypto assets.^[2] The following excerpts from the report illustrate the administration’s view of the crypto industry:

• It has been argued that crypto assets may provide other benefits, such as improving payment systems, increasing financial inclusion, and creating mechanisms for the distribution of intellectual property and financial value that bypass intermediaries that extract value from both the provider and recipient. Looking under the hood at these arguments, however, shows a more complicated picture. So far, crypto assets have brought none of these benefits. [emphasis added]
• Crypto assets to date do not appear to offer investments with any fundamental value, nor do they act as an effective alternative to fiat money, improve financial inclusion, or make payments more efficient; instead, their innovation has been mostly about creating artificial scarcity in order to support crypto assets' prices — and many of them have no fundamental value.
• Many participants in the crypto asset industry are not acting in compliance with existing laws and regulations, and some of the most common unlawful activities in the crypto asset industry are scams especially aimed at retail investors.

1. The use of Crypto Kiosks for Criminal Activity

Crypto kiosks have garnered negative attention from law enforcement for their use in various criminal activities. These criminal activities can generally be organized in two categories: fraud and organized crime.

Fraud

The very design of crypto kiosks makes them an attractive vector for scammers and fraudsters seeking to take advantage of people. According to TRM Labs, a leading blockchain analytics company:

Crypto ATMs are marketed as tools to help individuals convert their money into crypto with maximum privacy and ease, and less friction than at crypto exchanges. Crypto ATMs can be an attractive payment method for elderly people and others who might be otherwise unfamiliar with crypto. These characteristics also make them attractive vehicles for scammers.

Cash-to-crypto services are not associated with any one particular type of scam. Instead they are used by perpetrators of romance scams, investment scams, impersonation scams and others as neutral platforms enabling payment by victims.^[3]

TRM is aware of $40 million sent to known scam addresses via cash-to-crypto services, such as crypto kiosks, in 2022, making up 4% of the total cash-to-crypto market. TRM acknowledged that figure will likely be adjusted upward as new schemes become unmasked.

The Federal Bureau of Investigation (FBI) recently issued an alert regarding a spike in crypto investment schemes.^[4] The FBI release states:

The schemes are socially-engineered and trust-enabled, usually beginning with a romance or confidence scam and evolving into cryptocurrency investment fraud. Criminals use fictitious identities to develop relationships and build rapport with victims. Criminals target victims using dating applications (apps), social media platforms, professional networking sites, or encrypted messaging apps.

Once trust is established with victims, criminals introduce the topic of cryptocurrency and claim to have expertise, or an affiliation with experts, who can help potential investors achieve financial success. Criminals then convince victims to use fraudulent websites or apps, controlled by the criminals, to invest in cryptocurrency. Criminals coach victims through the investment process, show them fake profits, and encourage victims to invest more. When victims attempt to withdraw their money, they are told they need to pay a fee or taxes. Victims are unable to get their money back, even if they pay the imposed fees or taxes.

Crypto kiosks are not the exclusive or even primary means through which crypto-related frauds and scams are conducted, and some operators take measures to prevent and combat these forms of fraud from being perpetrated through their machines. Other operators, however, toe the line of negligence to outright criminal conspiracy in allowing their machines to be used for fraud, as indicated by a recent indictment of a crypto kiosk operator in Ohio who allegedly has knowingly benefited from victims of crypto scams.^[5]

Organized crime

Federal government agencies have cited the use of crypto kiosks to facilitate drug and human trafficking and other organized crime. The Governmental Accountability Organization (GAO) published a report in December 2021 discussing the use of online marketplaces and crypto assets in drug and human trafficking.^[6] The report cites findings from the Drug Enforcement Agency (DEA) that Mexican and Colombian transnational criminal organizations have used crypto kiosks to transfer proceeds internationally. The GAO report estimated kiosks have been rapidly increasing in the U.S., growing from about 560 in January 2017 to over 22,600 as of September 1, 2021. As market usage expands, FBI officials told the GAO that they expect to see an increase in the use of crypto kiosks for illicit purposes, including for human and drug trafficking.

1. Consumer Protection Concerns

As previously mentioned, crypto kiosks cater more toward consumers with low information about crypto markets, rather than consumers with high information. Targeting a less informed consumer segment raises concerns that an operator of crypto kiosks will price its offerings less competitively, knowing that its customer base is less likely to shop around for the best value. This concern is generally reflected in the marketplace with crypto kiosks typically collecting charges of 12 – 25% over the value of crypto assets, compared to trading fees of less than 1% on popular online platforms.

A site visit of a crypto kiosk in the Sacramento area found the following mark-ups on some of the most popular crypto assets:

Kiosk operators attempt to justify high fees and mark-ups by pointing to their cost structures. According to operators, crypto kiosks are costly to provide, with significant expenses related to rents (i.e., payments to retailers for placing the kiosks in their stores) and cash handling (i.e., ensuring the kiosks are stocked with sufficient cash and that cash receipts are picked up timely and deposited in an operator’s bank account). Additionally, it is likely that many kiosks experience very low utilization with only a few customers per day or week, exacerbating the economic challenges of operating a kiosk profitably without charging high mark-ups. The Legislature faces the question of whether consumers with low information about crypto markets should bear the costs of inefficient business models employed by kiosk operators.

In addition to high fees, many crypto kiosks require consumers to create a non-custodial digital wallet in which to hold their crypto assets. While opponents of this bill attempt to spin this feature as a consumer protection, non-custodial wallets present significant risks, especially to consumers who lack technological sophistication and knowledge of crypto-related technologies. Unlike crypto assets held in a custodial wallet at a major exchange, such as Coinbase, if a consumer loses or forgets their password to access their non-custodial wallet, their crypto assets are lost forever – there is no customer service to call or password reset option to recover their access. Given the customer segment that operators admittedly target (i.e., consumers who are typically unfamiliar with crypto markets), this mechanism for storage presents significant risk of loss that are unusual in traditional financial institutions, like banks, money transmitters, and securities brokerage accounts.

1. Approach of this Bill

This bill addresses the risks posed by crypto kiosks in several ways. In response to concerns about the use of crypto kiosks for fraud and other criminal activity, the bill seeks to mitigate the size of financial harm related to fraud and deter the use of kiosks by criminal organizations by limiting the size of transactions that any person can initiate to $1,000 per day. To improve oversight of the industry, the bill requires operators to provide DFPI with the locations of all kiosks, which DFPI is required to post online. This transparency will help both DFPI and local law enforcement crackdown on unregistered kiosks that they discover when investigating complaints. To address consumer protection concerns, the bill requires operators to provide receipts with clear disclosure of fees and spreads charged for transaction, and to limit onerous fees, the bill caps charges at no greater than $5 per transaction or 2% of the transaction amount, whichever is greater.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

According to the Senate Appropriations Committee, unknown costs, ranging into the low hundreds of thousands of dollars, to the DFPI for workload associated with creating and maintaining the list of digital financial asset kiosks and ensuring kiosk compliance with the requirements of this bill.

SUPPORT: (Verified 5/18/23)

Consumer Federation of California
Older Women's League Sacramento Capitol

OPPOSITION: (Verified 5/18/23)

American Petroleum and Convenience Store Association
Athena Bitcoin
ATM Industry Association
Bitcoindepot
Bitmachina
Bitstop

Blockchain Advocacy Coalition
Budget Coinz
Cal Asian Chamber of Commerce
California Black Chamber of Commerce
California Fuels and Convenience Alliance
California Grocers Association
Cash2bitcoin
Chamber of Digital Commerce
Coin Time

Coin Cloud
Coinflip
Digitalcoin
General Bytes
Genesis Coin
InstabitATM
Kiosk Manufacturer Association
National Bitcoin ATM
Neighborhood Market Association
Powercoin
Rockitcoin
Westcliff Technologies, Inc

ARGUMENTS IN SUPPORT: Consumer Federation of California and Older Women’s League (OWL) Sacramento Capitol write in support:

Proper regulation and consumer protections are vitally important when it comes to the arena of cryptocurrency, an extremely volatile area of financial mechanisms where a consumer’s wellbeing can be on the line…crypto ATMs not only charge an enormous transaction fee for the purchase or sale of crypto assets, with fees typically adding 12%-25% to the purchase price of a crypto asset, but they also serve as hotbeds to cover up illicit activity…SB 401 seeks to reduce Californian’s exposure to financial harm associated with crypto kiosks and for that reason we respectfully ask for your support and aye vote on this bill.

ARGUMENTS IN OPPOSITION: Blockchain Advocacy Coalition writes in opposition:

SB 401… unfairly targets a specific technology that allows everyday consumers to conveniently buy and sell cryptocurrency and participate in the digital asset economy. Specifically, the proposed fee cap and deposit/withdrawal restrictions impose a barrier of entry that does not exist for other financial services and will result in the industry ceasing to operate in the state of California.

Prepared by: Michael Burdick / B. & F.I. /

5/20/23 12:44:48

**** END ****

1. https://coinatmradar.com/state/6/bitcoin-atm-california/ ↑

2. https://www.whitehouse.gov/wp-content/uploads/2023/03/ERP-2023.pdf ↑

3. https://www.trmlabs.com/post/crypto-atm-payments-linked-to-known-scam-addresses ↑

4. https://www.ic3.gov/Media/Y2023/PSA230314 ↑

5. https://cointelegraph.com/news/bitcoin-atm-firm-profited-from-crypto-scams-via-unlicensed-kiosks-secret-service ↑

6. https://www.gao.gov/assets/gao-22-105462.pdf ↑

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2023 - 2024 Regular Session

SB 401 (Limón) - Digital financial asset transaction kiosks

Bill Summary:

SB 401 provides for the regulation of digital financial asset transaction kiosks, as specified.

Fiscal Impact:

Unknown costs, ranging into the low hundreds of thousands of dollars, to the Department of Financial Protection and Innovation (DFPI) for workload associated with creating and maintaining the list of digital financial asset kiosks and ensuring kiosk compliance with the requirements of this bill.

Background:

A digital financial asset transaction kiosk (more colloquially known as a “crypto kiosk”) is a physical machine that allows a consumer to buy and sell crypto assets, like bitcoin or ether, using cash, debit or credit card, or bank transfer. Crypto kiosks are often found in grocery, convenience, or liquor stores, and generally target consumers who are less technologically savvy and less knowledgeable about crypto markets than consumers who purchase crypto assets on online and mobile platforms.

Operators of crypto kiosks are not subject to any state oversight or regulation of their business practices. The DFPI has not deemed crypto assets as “money” under state money transmission laws, and California has yet to enact a regulatory framework for crypto-related business activities. Under federal law, operators must comply with laws designed to combat money laundering and terrorist financing, but consumers in California enjoy no legal protections designed to protect their financial interests when transacting at crypto kiosks.

Proposed Law:

• Prohibits an operator of a digital financial asset transaction kiosk from:
  • Accepting or dispensing more than $1,000 in a day from or to a resident.
  • Collect charges, directly or indirectly, related to a single digital financial asset transaction greater than either $5 or two percent of the U.S. dollar equivalent of digital financial assets involved in the transaction.
• Requires an operator of a digital financial asset transaction kiosk to:
  • Provide an option for a resident to exchange any amount of digital financial asset for fiat currency unless the resident has a balance fiat currency with an operator exceeding $1,000.
  • Provide a resident with a receipt for any transaction made at the operator’s kiosk. Requires the receipt to include the name of the resident, date and time of transaction, operator’s name, amount of assets involved in the transaction, amount of U.S. dollars involved in the transaction, operator fees, amount of U.S. dollar spread between dollar price and the digital financial asset charged, and the name of the major platform the operator used to calculate the spread.
  • Provide the DFPI a list of all kiosk locations that the operator owns, operates, or manages. Requires the operator to update this list within 30 days of any changes.
• Requires DFPI to make the kiosk location list available to the public on its website.
• Establishes definitions for purposes of regulating digital financial asset transaction kiosks.

Related Legislation:

AB 39 (Grayson, 2023) would provide a broad licensing framework for persons engaged in digital financial asset business activity. AB 39 is pending in the Assembly Banking and Finance Committee.

Staff Comments: The programs under the DFPI are funded by regulatory and license fees and generally the department does not receive support from the General Fund. Staff notes this bill does not include a funding mechanism to offset any workload the DFPI will incur in the regulation of digital financial asset transaction kiosks. To the extent this workload is not absorbable within existing resources, there may be new cost pressures that impact the department’s operating costs or future budget requests.

-- END --

SENATE COMMITTEE ON

BANKING AND FINANCIAL INSTITUTIONS

Senator Monique Limón, Chair

2023 - 2024 Regular

Bill No: SB 401 Hearing Date: March 29, 2023

Subject: Digital financial asset transaction kiosks

SUMMARY

This bill provides for the regulation of digital financial asset transaction kiosks, including limits on the total amount of transactions in a day, fee limitations, and a requirement to provide a receipt for every transaction.

EXISTING LAW

1. Establishes the Department of Financial Protection and Innovation (DFPI) as the state agency responsible for licensing, regulating, and supervising a range of financial services companies that provide products or services to California consumers, including but not limited to, securities issuers, broker-dealers, investment advisers, and investment advisers representatives; persons offering or selling off-exchange commodities; persons holding securities as custodians on behalf of securities owners; money transmitters; and persons offering or providing consumer financial products or services. (Financial Code Section 300)
2. Provides the California Consumer Financial Protection Law (CCFPL), which authorizes DFPI to take enforcement action against a person that engages in an unlawful, unfair, deceptive, or abusive act or practice with respect to consumer financial products or services. (Division 24 of the Financial Code, commencing with section 90000)

THIS BILL

1. Defines the following terms, among others:
   1. “Digital financial asset” means a digital representation of value that is used as a medium of exchange, unit of account, or store of value and that is not legal tender, whether or not denominated in legal tender.
   2. “Digital financial asset transaction kiosk” means an electronic information processing device that accepts or dispenses cash in exchange for a digital financial asset.
2. Prohibits an operator of a digital financial asset transaction kiosk from the following:
   1. Accepting or dispensing more than $1,000 in a day from or to a resident.
   2. Collecting charges, whether direct or indirect, related to a single digital financial asset transaction that exceed the greater of the following:
      1. Five dollars ($5).
      2. Two percent of the United States dollar equivalent of digital financial assets involved in the transaction.
3. Requires an operator to do the following:
   1. Provide an option for a resident to exchange any amount of a digital financial asset for fiat currency.
   2. Provide a receipt with specified information for any transaction made at a kiosk.
   3. Provide a list of all kiosk locations to DFPI, which DFPI shall make publicly available on its website.

COMMENTS

1. PURPOSE

According to the author:

SB 401 establishes consumer protections for crypto kiosks to reduce fraud and other criminal activity and rein-in high mark-ups on crypto transactions. The bill mitigates the risk of transactions related to fraud and other criminal activity by limiting the amount of transactions to no more than $1,000 per customer per day. The bill also requires an operator of a crypto kiosk to provide a detailed receipt to a consumer with specified information about the transaction and caps the transaction fees that operators can charge to no more than $5 or 2% of the value of the transaction, whichever is greater.

1. BACKGROUND

A digital financial asset transaction kiosk (more colloquially known as a “crypto kiosk”) is a physical machine that allows a consumer to buy and sell crypto assets, like bitcoin or ether, using cash, debit or credit card, or bank transfer. Crypto kiosks are often found in grocery, convenience, or liquor stores, and generally target consumers who are less technologically savvy and less knowledgeable about crypto markets than consumers who purchase crypto assets on online and mobile platforms, such as Coinbase and Kraken.

Operators of crypto kiosks are not subject to any state oversight or regulation of their business practices. The Department of Financial Protection and Innovation has not deemed crypto assets as “money” under state money transmission laws, and California has yet to enact a regulatory framework for crypto-related business activities. Under federal law, operators must comply with laws designed to combat money laundering and terrorist financing, but consumers in California enjoy no legal protections designed to protect their financial interests when transacting at crypto kiosks. According to Coin ATM Radar, there are over 3,500 crypto kiosks operating in California.^[1]

1. WHAT IS THE POINT OF CRYPTO KIOSKS?

Proponents of crypto kiosks are fundamentally believers in the value of crypto assets and see crypto kiosks as a user-friendly entry point for certain consumer segments to engage in crypto markets. Crypto adherents tout a variety of arguments to support the value of crypto assets, including the ability to transact digitally in more private and relatively faster means than some services in the traditional financial system. Others see crypto as an alternative asset class that has the potential to generate high returns over a short period of time. As a whole, the crypto industry appears to cater more towards the latter group of speculators, rather than the former group who see crypto as an alternative payment mechanism.

Crypto kiosks are designed to serve the “crypto curious” consumer, rather than the highly informed and digitally savvy consumer. Many users of crypto assets have sufficient knowledge and comfort to navigate the predominantly digital environments through which crypto assets are sold, transferred, and stored. This knowledgeable segment of users would rarely, if ever, interact with a crypto kiosk due to the high fees and limited user experience provided by kiosks, compared to online-only alternatives. Instead, operators of crypto kiosks target potential customers who have relatively little information about crypto markets but have maybe heard of a friend or relative who has made money speculating in crypto. Hence, the business model of crypto kiosk operators appears to be placing kiosks in areas where all people frequent, like grocery and convenience stores, hoping to attract the curious customer who can purchase crypto assets upon providing a few taps and inputs on the kiosk screen.

Skeptics of the crypto industry see crypto kiosks as an extractive on-ramp into an ecosystem rooted in speculative and gambling-like behavior. These critics question whether there is any value in providing more access points for consumers to purchase crypto assets that contain no legal claim to underlying assets or cash flows. The Biden administration released its Economic Report of the President on March 20, 2023, which includes an entire chapter on crypto assets.^[2] The following excerpts from the report illustrate the administration’s view of the crypto industry:

• It has been argued that crypto assets may provide other benefits, such as improving payment systems, increasing financial inclusion, and creating mechanisms for the distribution of intellectual property and financial value that bypass intermediaries that extract value from both the provider and recipient. Looking under the hood at these arguments, however, shows a more complicated picture. So far, crypto assets have brought none of these benefits. [emphasis added]
• Crypto assets to date do not appear to offer investments with any fundamental value, nor do they act as an effective alternative to fiat money, improve financial inclusion, or make payments more efficient; instead, their innovation has been mostly about creating artificial scarcity in order to support crypto assets' prices — and many of them have no fundamental value.
• Many participants in the crypto asset industry are not acting in compliance with existing laws and regulations, and some of the most common unlawful activities in the crypto asset industry are scams especially aimed at retail investors.

1. THE USE OF CRYPTO KIOSKS FOR CRIMINAL ACTIVITY

Crypto kiosks have garnered negative attention from law enforcement for their use in various criminal activities. These criminal activities can generally be organized in two categories: fraud and organized crime.

Fraud

The very design of crypto kiosks makes them an attractive vector for scammers and fraudsters seeking to take advantage of people. According to TRM Labs, a leading blockchain analytics company:

Crypto ATMs are marketed as tools to help individuals convert their money into crypto with maximum privacy and ease, and less friction than at crypto exchanges. Crypto ATMs can be an attractive payment method for elderly people and others who might be otherwise unfamiliar with crypto. These characteristics also make them attractive vehicles for scammers.

Cash-to-crypto services are not associated with any one particular type of scam. Instead they are used by perpetrators of romance scams, investment scams, impersonation scams and others as neutral platforms enabling payment by victims.^[3]

TRM is aware of $40 million sent to known scam addresses via cash-to-crypto services, such as crypto kiosks, in 2022, making up 4% of the total cash-to-crypto market. TRM acknowledged that figure will likely be adjusted upward as new schemes become unmasked.

The Federal Bureau of Investigation (FBI) recently issued an alert regarding a spike in crypto investment schemes.^[4] The FBI release states:

The schemes are socially-engineered and trust-enabled, usually beginning with a romance or confidence scam and evolving into cryptocurrency investment fraud. Criminals use fictitious identities to develop relationships and build rapport with victims. Criminals target victims using dating applications (apps), social media platforms, professional networking sites, or encrypted messaging apps.

Once trust is established with victims, criminals introduce the topic of cryptocurrency and claim to have expertise, or an affiliation with experts, who can help potential investors achieve financial success. Criminals then convince victims to use fraudulent websites or apps, controlled by the criminals, to invest in cryptocurrency. Criminals coach victims through the investment process, show them fake profits, and encourage victims to invest more. When victims attempt to withdraw their money, they are told they need to pay a fee or taxes. Victims are unable to get their money back, even if they pay the imposed fees or taxes.

Crypto kiosks are not the exclusive or even primary means through which crypto-related frauds and scams are conducted, and some operators take measures to prevent and combat these forms of fraud from being perpetrated through their machines. Other operators, however, toe the line of negligence to outright criminal conspiracy in allowing their machines to be used for fraud, as indicated by a recent indictment of a crypto kiosk operator in Ohio who allegedly has knowingly benefited from victims of crypto scams.^[5]

Organized crime

Federal government agencies have cited the use of crypto kiosks to facilitate drug and human trafficking and other organized crime. The Governmental Accountability Organization (GAO) published a report in December 2021 discussing the use of online marketplaces and crypto assets in drug and human trafficking.^[6] The report cites findings from the Drug Enforcement Agency (DEA) that Mexican and Colombian transnational criminal organizations have used crypto kiosks to transfer proceeds internationally. The GAO report estimated kiosks have been rapidly increasing in the U.S., growing from about 560 in January 2017 to over 22,600 as of September 1, 2021. As market usage expands, FBI officials told the GAO that they expect to see an increase in the use of crypto kiosks for illicit purposes, including for human and drug trafficking.

1. CONSUMER PROTECTION CONCERNS

As previously mentioned, crypto kiosks cater more toward consumers with low information about crypto markets, rather than consumers with high information. Targeting a less informed consumer segment raises concerns that an operator of crypto kiosks will price its offerings less competitively, knowing that its customer base is less likely to shop around for the best value. This concern is generally reflected in the marketplace with crypto kiosks typically collecting charges of 12 – 25% over the value of crypto assets, compared to trading fees of less than 1% on popular online platforms.

Committee staff recently conducted a site visit of a crypto kiosk in the Sacramento area and found the following mark-ups on some of the most popular crypto assets:

Kiosk operators attempt to justify high fees and mark-ups by pointing to their cost structures. According to operators, crypto kiosks are costly to provide, with significant expenses related to rents (i.e., payments to retailers for placing the kiosks in their stores) and cash handling (i.e., ensuring the kiosks are stocked with sufficient cash and that cash receipts are picked up timely and deposited in an operator’s bank account). Additionally, it is likely that many kiosks experience very low utilization with only a few customers per day or week, exacerbating the economic challenges of operating a kiosk profitably without charging high mark-ups. The author and committee face the question of whether consumers with low information about crypto markets should bear the costs of inefficient business models employed by kiosk operators.

In addition to high fees, many crypto kiosks require consumers to create a non-custodial digital wallet in which to hold their crypto assets. While opponents of this bill attempt to spin this feature as a consumer protection, non-custodial wallets present significant risks, especially to consumers who lack technological sophistication and knowledge of crypto-related technologies. Unlike crypto assets held in a custodial wallet at a major exchange, such as Coinbase, if a consumer loses or forgets their password to access their non-custodial wallet, their crypto assets are lost forever – there is no customer service to call or password reset option to recover their access. Given the customer segment that operators admittedly target (i.e., consumers who are typically unfamiliar with crypto markets), this mechanism for storage presents significant risk of loss that are unusual in traditional financial institutions, like banks, money transmitters, and securities brokerage accounts.

1. EXAMINING “FINANCIAL INCLUSION” CLAIMS IN CRYPTO

Many companies in the crypto industry tout crypto assets as an alternative system for unbanked people, an opportunity for wealth building in underserved communities, and a competitive solution for cross-border payments. Upon further inspection, the industry has yet to deliver on such promises for American consumers, as argued adeptly by Tonantzin Carmona in research published by the Brookings Institute and summarized in the following paragraphs.^[7]

Crypto products are not well-tailored for the needs of unbanked consumers. Nearly all online exchanges require a bank account in order to purchase crypto assets. And despite marketing their services as a solution for unbanked consumers, many operators of crypto kiosks do not offer the option for a consumer to convert a crypto asset into cash. So while operators will readily accept cash from unbanked consumers in exchange for a crypto asset, they do not offer the consumer the ability to sell the crypto asset in exchange for physical cash. Moreover, as discussed in the previous section, crypto kiosks charge high transaction fees that often exceed the high fees charged by alternative financial service providers, like payday lenders, check cashers, and prepaid card providers. Based on the industry’s current offerings, it is difficult to see how crypto provides better services for unbanked consumers than existing alternatives.

Arguments that crypto provides wealth building opportunities for underserved communities are not supported by data, even before taking into account the high fees charged by crypto kiosk operators. Research from the Bank of International Settlements finds that retail investors often enter crypto markets at the wrong time, typically after sharp increases in prices.^[8] The researchers compiled a large dataset of crypto trading app downloads from 2015 through 2022 and ran models of trading behaviors that show a majority of retail investors likely lost money on their bitcoin investments, with the median investor losing $431 of their $900 investment. Notably, the researchers do not account for transaction fees, which would further erode investors’ returns, especially if those investors purchased crypto assets at kiosks. To better contextualize the effect of crypto kiosk fees, if similar fees were charged on stock transactions, investors would have lost money on a well-diversified portfolio over the last ten years, even though the S&P 500 grew by 2.5x over that time period. In essence, it is virtually impossible for the average retail investor to build wealth by purchasing crypto assets from a crypto kiosk.

The promise of crypto as a better solution for cross border remittances has also failed to bear fruit. Even using online exchanges that charge modest fees, crypto solutions carried higher prices than traditional options. For example, one estimation of total fees incurred for buying, sending, and cashing out $200 worth of tether, a popular stablecoin, across different exchanges varied from $5.98 to $9.58 at the lowest ranges to $80.24 to $86.44 at the highest. This was compared to $4.88 in total fees from Western Union, a money transfer provider, to send $200 from the U.S. to Europe.^[9] Crypto kiosks assess charges at the high end of that range, reflecting fees that are at least 10x more expensive than existing options.^[10]

In summary, claims from operators of crypto kiosks and the broader crypto industry that crypto provides “financial inclusion” benefits should be viewed skeptically. To date, crypto has not solved the fundamental problems facing unbanked and underserved communities – access to low-cost ways to spend, save, and borrow money. Rather, crypto offers ill-fitting products and services that often carry higher fees and higher risks than existing alternatives.

1. APPROACH OF THIS BILL AND IDEAS FOR FURTHER CONSIDERATION

This bill addresses the risks posed by crypto kiosks in several ways. In response to concerns about the use of crypto kiosks for fraud and other criminal activity, the bill seeks to mitigate the size of financial harm related to fraud and deter the use of kiosks by criminal organizations by limiting the size of transactions that any person can initiate to $1,000 per day. To improve oversight of the industry, the bill requires operators to provide DFPI with the locations of all kiosks, which DFPI is required to post online. This transparency will help both DFPI and local law enforcement crackdown on unregistered kiosks that they discover when investigating complaints. To address consumer protection concerns, the bill requires operators to provide receipts with clear disclosure of fees and spreads charged for transaction, and to limit onerous fees, the bill caps charges at no greater than $5 per transaction or 2% of the transaction amount, whichever is greater.

Based on the author’s goals of mitigating fraud, combatting organized crime, and protecting consumers, the following ideas may serve as complements or substitutes for the provisions currently contained in the bill.

Mitigating fraud

Some frauds and scams attempt to create a sense of urgency in their victims, such as suggesting that an investment opportunity will go away in only a few hours or, in imposter frauds, that the loved one the scammer is impersonating needs the funds immediately to avoid trouble. These fraudsters know that such stress can lead people to forego second guessing of their actions, and one way to upset these strategies is to slow down the ways in which funds are transferred.

• To address this component of some frauds, the author could consider implementing a 3-day delay for operators to deliver a crypto asset to a new crypto wallet address that the operator has not transacted with previously. Such a delay could deter fraudsters from using crypto kiosks as part of their frauds and give law enforcement more time to freeze funds that are suspected to be part of a fraudulent scheme.

Organized crime

Operators of crypto kiosks used primarily or exclusively for organized crime may be unlikely to comply with the provisions of this bill, including the requirement to notify DFPI of all kiosk locations. Crypto kiosks, however, are unlikely to be valuable if they cannot be serviced by cash management services, such as armored carriers.

• To choke out illicit uses of crypto kiosks for organized crime, the author could consider a provision that makes it unlawful for cash management services to serve unregistered crypto kiosks. The bill could include civil or even criminal remedies to deter this activity.

Consumer protections

Opposition argues the fee cap proposed by this bill would effectively outlaw crypto kiosks in California. To the extent the author considers flexibility on the fee cap, there are several other provisions that could serve to better protect consumers than the lightly regulated market that exists today.

• The author could prohibit the purchase of crypto assets using credit cards. Very few, if any, brokers in traditional financial markets allow consumers to purchase stock or bonds using credit cards. Crypto assets, as a class, are even more volatile and lack the quality of disclosures required by issuers of stock and bonds, which compounds the risk of using credit to finance speculative activity.
• The author could require a prescriptive, standalone disclosure notifying customers about the difference in the price being offered by an operator of a crypto kiosk relative to the price offered for the same crypto asset by a major online crypto platform. If the author relaxes the fee cap, consumers deserve to know that they are being charged far higher prices at kiosks than at other popular crypto trading venues.
• For crypto kiosks that do not dispense cash, the author could require a prominent, standalone disclosure that clearly notifies consumers, prior to displaying any offer to sell the consumer a crypto asset, that the kiosk does not dispense cash and that the consumer will need to find some other way to exchange their crypto asset for cash if they desire such a conversion.
• The author could fold the provisions of this bill into a broader regulatory framework, such as that proposed by AB 39 (Grayson), which is currently under consideration of the Assembly Banking and Finance Committee. As a standalone bill, the provisions of this bill would be enforceable by DFPI under authority provided by the Legislature pursuant to the California Consumer Financial Protection Law. AB 39, however, provides a comprehensive licensing framework through which operators of crypto kiosks would be required to apply to DFPI prior to offering services to Californians and establishes a higher standard for ongoing supervision by DFPI to ensure operators are complying with all requirements of the licensing law.

1. ARGUMENTS IN SUPPORT

Consumer Federation of California and Older Women’s League (OWL) Sacramento Capitol write in support:

Proper regulation and consumer protections are vitally important when it comes to the arena of cryptocurrency, an extremely volatile area of financial mechanisms where a consumer’s wellbeing can be on the line…crypto ATMs not only charge an enormous transaction fee for the purchase or sale of crypto assets, with fees typically adding 12%-25% to the purchase price of a crypto asset, but they also serve as hotbeds to cover up illicit activity…SB 401 seeks to reduce Californian’s exposure to financial harm associated with crypto kiosks and for that reason we respectfully ask for your support and aye vote on this bill.

1. ARGUMENTS IN OPPOSITION

Blockchain Advocacy Coalition writes in opposition:

SB 401… unfairly targets a specific technology that allows everyday consumers to conveniently buy and sell cryptocurrency and participate in the digital asset economy. Specifically, the proposed fee cap and deposit/withdrawal restrictions impose a barrier of entry that does not exist for other financial services and will result in the industry ceasing to operate in the state of California.

1. PRIOR AND RELATED LEGISLATION

Assembly Bill 39 (Grayson, 2023) provides a broad licensing framework for persons engaged in digital financial asset business activity. The bill is currently pending in the Assembly Banking and Finance Committee.

Assembly Bill 2269 (Grayson, 2022, vetoed by the Governor) provided a broad licensing framework for persons engaged in digital financial asset business activity. The bill included a provision prohibiting a licensee from accepting or dispensing more than $1,000 in a day from or to a customer via an electronic information processing device which accepts or dispenses cash when engaging in digital financial asset business activity at the request of the customer.

LIST OF REGISTERED SUPPORT/OPPOSITION

Support

Consumer Federation of California
Older Women's League Sacramento Capitol

Opposition

Chamber of Digital Commerce
Westcliff Technologies, Inc

Oppose Unless Amended

Blockchain Advocacy Coalition
Coin Cloud

-- END --

1. https://coinatmradar.com/state/6/bitcoin-atm-california/ ↑

2. https://www.whitehouse.gov/wp-content/uploads/2023/03/ERP-2023.pdf ↑

3. https://www.trmlabs.com/post/crypto-atm-payments-linked-to-known-scam-addresses ↑

4. https://www.ic3.gov/Media/Y2023/PSA230314 ↑

5. https://cointelegraph.com/news/bitcoin-atm-firm-profited-from-crypto-scams-via-unlicensed-kiosks-secret-service ↑

6. https://www.gao.gov/assets/gao-22-105462.pdf ↑

7. https://www.brookings.edu/research/debunking-the-narratives-about-cryptocurrency-and-financial-inclusion/ ↑

8. https://www.bis.org/publ/bisbull69.pdf ↑

9. https://www.banking.senate.gov/imo/media/doc/Goldstein%20Testimony%2012-14-21.pdf ↑

10. Per the World Bank, transfer services assess fees of 1-3% for remittances across popular corridors, such as U.S. to Mexico, U.S. to Philippines, U.S. to India, and U.S. to China. See: https://remittanceprices.worldbank.org/ ↑