Fraud is a known problem in Canada's crypto ATM industry. What are operators doing about it?

jerry lee lewis ship's bell remembers customers tears.

For trinity months, his book of job was to answer support calls from customers of Canada's biggest crypto ATM company, Localcoin, from his home in Toronto.

Most of the time, Bell says the callers were fraud victims.

"It's tough, basically breaking the worst news possible to someone," he said. 

"They're just grasping for the hope that we can refund it or return the money. And you have to be the one to say no, and in some cases, it was potentially [their] life savings … it dwells on you."

Who's running crypto ATMs and what are they doing about fraud?

However, Marc Grens, who co-founded a U.S. Crypto ATM business in 2014, disagrees. 

"Without these scam victims, these victimizations, these companies wouldn't survive. These Bitcoin ATMs wouldn't exist."

When Grens started his crypto ATM business, he thought the machines would provide a low-cost alternative to money services for remittance in the U.S. 

"We learned by increasing our compliance and really wanting to get to know the customer that that was a false narrative," said Grens, who co-founded DigitalMint in 2014. 

At its height, his company operated about 1,400 machines across 35 U.S. States. But he shut it down a couple years ago, primarily because of fraud. 

"To do the right thing is not profitable in this industry," Grens said. "The problem is these operators make way too much money."

Touted as a fast, accessible way to buy cryptocurrency, there are now more crypto ATMs per capita in Canada than anywhere else in the world, with about 91 per million people, according to analysis from blockchain intelligence firm TRM Labs. 

But the convenience comes at a price.

"The fees to use these ATMs are on average 15 to 30 per cent to buy cryptocurrency," said Det. David Coffey with Toronto police's financial crimes unit.

"You can go on your laptop right now and do the same thing through a legitimate exchange and pay four or five per cent."

The biggest three crypto ATM companies in Canada run between about 350 and 1,050 machines each, and take a 16 to 19.9 per cent cut of each transaction alongside a flat service fee of a few dollars. 

"I've yet to be convinced of an argument as to their legitimate usage — just based on the fees alone," Coffey said.

Canadian operators like HODL Digital Services say they're able to make a profit by charging fees on small, legitimate transactions.

"The vast majority of the transactions on our machines are under $1,000," said Sam Mokbel, president of HODL, which operates the third most crypto ATMs in Canada.

"We don't think that scammers and money launderers are gonna waste their money, their time, just focusing on sending $500 here, $50 here."

Localcoin did not respond to interview requests. Neither did FastBTCatm, which has the second most machines in Canada, and HoneyBadger, which has the fifth most across the country. 

HODL was the only operator that agreed to an interview.

Mokbel started the company in 2018 with two machines in Southern Ontario, and now has 340 ATMs across Ontario, Quebec, Alberta, Manitoba and Nova Scotia. He estimates fraudulent transactions that aren't detected and prevented by his company's anti-fraud measures make up less than five per cent of overall transactions, but said the company doesn't track those statistics.

"Some people don't feel comfortable using the bank to send to a crypto exchange," said Mokbel.

"They're a lot cheaper, but they're a little bit cumbersome to go through. Even if you want to buy $100 worth of crypto, you still have to go through a lengthy process. On our machines, you take your $100, you put it in the machine; two minutes later, you're done."

Bitcoin Depot said its business is built on legitimate users making small transactions of around $200 for "remittances, online purchases or small investments." CoinFlip said its customers range from "cash-dependent professionals such as barbers who invest their cash tips into crypto" to experienced investors who like their machines' convenience.

Regulation of crypto ATM companies in Canada is grouped with other money services businesses under federal anti-money laundering law. Under that designation, the operators have to register with the country's financial intelligence agency, FINTRAC, submit reports for large cash transactions and suspicious transactions, and follow know your customer (KYC) rules for transactions over $1,000. 

Mokbel said HODL's crypto ATMs have mechanisms to stop customers from depositing cash –– like when a customer checks "yes" to a prompt about whether someone sent them to the machine –– a common sign they're a scam victim. 

The company has also set thresholds for when it will accept cash from a customer but freeze the transaction before the purchased crypto is sent to a wallet, like if a new customer tries to buy at least $10,000 of crypto.

"We go through all kinds of scams, or scam scenarios, with them. And if they're comfortable with all of that, we release it. If they're not, we offer to give them their money back. And very often they said, 'Yes, I would want my money back' and they're very happy."

Mokbel has also refunded his company's fees in a few cases where a customer later realized they were a victim of fraud.

"We're trying our best not to profit from criminal activity," he said.

But those efforts could be for naught if the whole industry isn't on board, according to Grens. Before shuttering his company, the former crypto ATM operator had tried to push for higher compliance standards in the U.S..

"They wanted nothing to do with it," he said of other operators.

As a result, Grens says his own company's enhanced anti-fraud measures just ended up sending fraud victims to competitors. 

"They would get mad at us," said Grens, using the example of a romance scam. 

"'My fiancé said we're not answering these, mind your business, and we're going to go to other Bitcoin ATM operators who never ask us any questions,'" he recalls people telling him.

So the work we did all went in vain."

TOMORROW: The third and final part of Feeding Fraud: The Crypto ATM Problem takes a hard look at the lack of specific regulations for crypto ATMs in Canada and how some say the country is falling behind its peers when it comes to taking steps to address fraud flowing through this industry.

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