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Bitcoin ATM Regulations with Bill Repasky

Peter McCormack
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Bitcoin ATM Regulations with Bill Repasky - WBD138 Peter McCormack

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Location: Skype
Date: Wednesday, 15th August
Project: Frost Brown Todd LLC
Role: Corporate Attorney

Regulations are have always been in front of mind for the Bitcoin industry. Ever-increasing surveillance has accompanied the evolution of technology, primarily financial surveillance. 

Bitcoin is the first money owned by the people and is often seen as a threat to the state, as such the state has struggled to adapt to it.

For businesses who operate in the industry, working with and understanding state regulations is non-negotiable. One company helping companies navigate this is Frost Brown Todd, one of the largest law firms in the Midwest United States.

In this interview, I speak to Bill Repasky, a Corporate Attorney with the firm, to talk about the potential hurdles of operating a Bitcoin ATM business. We discuss the regulatory requirements of FinCEN, Money Transmitter Licenses, and how the current landscape lends itself to companies able to scale.

TIMESTAMPS

00:03:39: Introductions
00:04:31: Bill’s background and how he ended up working with Bitcoin and Blockchain businesses
00:09:09: Exploring Bill’s thoughts on current regulations and if they should be updated
00:14:38: Touching on the limitations of KYC/AML and whether it leads to reduced privacy
00:18:12: Discussing complying with various federal regulations, including the Bank Secrecy Act 
00:24:31: Exploring whether the Bank Secrecy Act is draconian or acts successfully as a deterrent
00:30:52: Discussing further regulatory considerations, including state level money transmitter licenses
00:36:29: Delving into the limitations of these MTLs and questions they raise for ATM operators
00:42:30: Discussing how maintain MTLs can be burdensome and prohibitive to businesses
00:45:52: How does a distributed ledger fit into the FinCEN or MTL regulations?
00:48:41: Touching on other additional regulations that ATM operators need to follow
00:50:30: Exploring why seeking legal support is recommended, when setting up crypto businesses
00:52:49: Discussing the limits on Bitcoin ATMs and the associated challenges with each withdrawal tier
00:57:38: Touching on upcoming initiatives relevant to the ATM industry
00:58:38: Final comments and how to stay in touch

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TRANSCRIPTION

Peter McCormack: Hi there Bill, how are you?

Bill Repasky: I'm doing well this morning, Peter. Thank you very much.

Peter McCormack: Well, thank you for coming on the show. We're on vastly different time zones. If I'm doing this, I'm usually in the center of the world in England and I'm either speak to somebody forward ahead of me, but we're on vastly different times, because I'm out of here in Vietnam, you're there in Ohio!

Bill Repasky: Peter I'll correct you! I'm here in Louisville, Kentucky this morning.

Peter McCormack: Ah, I thought you were Ohio?

Bill Repasky: On the Ohio River in the United States and just downstream from the state of Ohio, but in Louisville, Kentucky. But it doesn't matter!

Peter McCormack: Okay, well listen, I've been running this week of shows dedicated to understanding more about the Bitcoin ATM industry. I've done three shows so far. I spoke to operators and manufacturers, but often those interviews kind of go into the regulatory area. So it's obviously great to speak to you about this. But firstly, could you just tell me a bit more about yourself, get a bit about your background, tell me a bit about Frost Brown Todd, and why you guys have ended up becoming kind of experts in this area.

Bill Repasky: Well Peter, glad to do it. Again, my name is Bill Repasky. I was born in Ohio, Peter, but I went to the University of Michigan, which means I was a traitor to the state of Ohio by attending a different university, which has a big rivalry. I then went down to Vanderbilt law school in Nashville, Tennessee.

Peter McCormack: Did you stay a Buckeye?

Bill Repasky: I still support the Buckeyes and University of Michigan when they play. So I'm impressed that about this!

Peter McCormack: So what do you do at Thanksgiving then?

Bill Repasky: I have a lot of fun because sometimes it doesn't really matter who wins in the game. It's just wonderful, the football season in the Midwest is unique and it's great to be there.

Peter McCormack: Do you know what it was? I actually used to date a girl from Ohio, so I got indoctrinated into supporting the Buckeyes.

Bill Repasky: They're wonderful people in Ohio and Michigan! Actually Peter, I want to tell you, after I graduated from Vanderbilt University in Nashville, I began a career as a bank lawyer and ultimately moved in house to one of the largest banks in America. While there, I did a variety of different types of work including operational compliance.

When I got started, the federal regulators interest in anti-money laundering, the Bank Secrecy Act and just general issues about the movement of money became front and center in the compliance world. So I learned, what I think we'll be talking about today, from the inside out, meaning working with a financial institution, a traditional financial institution, and then also with a business that did card processing and other related businesses that required it to have a money transmitter license for certain of its operations. 

So I picked up that knowledge for my 16+ years inside the industry. Then I moved over to Frost Brown Todd. Frost Brown Todd is one of the Midwest's largest law firms, if not the largest law firm and about roughly three years ago, we recognized the importance of the crypto currency Blockchain space and decided to collect a group of experts in their various subject areas that we thought would be most useful for, we'll call them crypto currency related business or virtual currency related businesses.

From people who are experts in corporate formation organization, those ICOs that everybody talks about, all the way down to people in my subset, which is compliance with federal and state laws that may impact the operations of various Blockchain related businesses.

Peter McCormack: Okay, so that was kind of a brave area to go into?

Bill Repasky: Well, it's an unavoidable area to go into as we've learned and I think most of us in the crypto space have learned over the last several years. Despite my personal libertarian leanings, we know to interface with American commerce, so to speak, we've got a couple of different masters that we still have to keep an eye on, while we are engaging in the virtual currency businesses in the United States.

It might be brave, but it's unavoidable. We have to come up with plans and approaches and develop business plans, honestly, that account for all these factors and help us succeed in what we want to do, in our various virtual currency businesses.

Peter McCormack: Right, and if you have a libertarian leaning, then I guess when you first heard about or discovered Bitcoin, it must've resonated with you a certain amount?

Bill Repasky: Oh, absolutely. I still think the potential is limitless in this area. I'm very excited to be involved in the industry and to be providing legal counsel where I can.

Peter McCormack: Let's stick with Bitcoin for now. What do you make of the progress of Bitcoin? I know regulators are looking at it more closely now, but it hasn't ever been an outright ban and it doesn't even feel like we are heading to an outright ban. Has that surprised you?

Bill Repasky: It hasn't surprised me. There's too much good in the DNA of Bitcoin, to consider an outright ban. I do not believe that the regulators interests lie in that area right now. In the largest possible sense, as a person who spends their time with, let's just call it roughly banking regulations, we're trying to fit a round and immoveable shape into what is a true square peg in the regulatory structure. 

This was a square peg, so to speak, the regulations were developed before the Internet came about and before people began to develop the concept of the possibilities and potentials of Blockchain technology. So what we're trying to do is shoehorn new technology into old regulatory structures.

Peter McCormack: Right I see. Do you think it's time for an update on certain regulations then? Are there certain areas, do you think, a bit outdated?

Bill Repasky: Well, I absolutely believe that. There are a number of different points I would want to run off with that great question, Peter. But the first thing I want to say is that when the industry really got up and running and all the fire in the world was under it, we were dealing with regulators who simply didn't understand the concepts or the principles. It seems like so much of my time was spent explaining what a distributed ledger was and how it is not like the coming of the devil into the world.

I have seen and personally believe, that over the last several years, that the individuals who are responsible for the administration implementation of the regulations that are causing us so much concern, are getting a lot smarter and I'm going to just give you one example. You probably have heard of the federal entity know as FinCEN; the financial crimes enforcement network. FinCEN is a regulatory body that is primarily over what's called the Bank Secrecy Act and this is a part of the federal laws of the United States that are causing or that are creating so many issues and uncertainties in the virtual currency space and we'll dive down into in a bit.

But when we first got involved with businesses in this area, there was a tremendous amount of uncertainty about how FinCEN would look at various different aspects of the Blockchain technology, when it comes to applying the existing, again, the ones we mentioned, the old school laws. We saw almost unexplainable and irreconcilable opinions and guidance from these people. However, I will say in their defense that over the last couple of years, they are really beginning to grasp the concepts that we and the businesses are dealing with.

Now that doesn't mean we always liked the results that they're getting, but for instance, the latest FinCEN guidance came out about two months ago now and it is much better. It is a holistic approach to looking at the various CVC or convertible virtual currency businesses that are operating and trying to explain how they fit into prior guidance. That document by itself is probably worth a read by any business person who's interested in getting into this space. From the ICO all the way down to the CVC ATM operator.

I know we often call it a Bitcoin ATM and that's a great term to use at a cocktail bar, but we all know that it's often more than just Bitcoin and FinCEN actually calls it a CVC, a convertible virtual currency ATM or Kiosk. So I think I got off track with what you were asking, do I think the regulatory structure is where it needs to be?

The answer is clearly no, but it appears that the momentum at those levels of government, are to try to take a heavy hammer to the old school regulatory structures and legal structures and try to hammer them into a shape that is more accommodating or more understanding of the virtual currency related businesses.

Peter McCormack: Yeah, because it feels kind of draconian. It feels like with KYC/AML, we are potentially losing a lot of the privacy opportunities that Bitcoin presents us, for what really feels like a very limited and a very low number of actual criminal uses of Bitcoin.

Bill Repasky: Well, you're right. As I complimented you on that question quite a while ago, that your question poses so many different rabbit holes we could run down. You're exactly right. Taking a look at this just at the highest level for people that don't have a basic understanding and tell me if I'm thinking in the right direction and bring me back to where you want me to go at any moment Peter. But let's say I get a phone call from an individual who's interested in starting a virtual currency business.

Just to keep things simple, let's pick one example. We've got a fella or a person who's interested in starting a Bitcoin ATM operation someplace in the United States. There are essentially three areas of laws and regulations that I first want to talk to this individual about and Peter, let's say it's you that's come to me. The first thing that I honestly like to begin the discussion with is, think about the old school aspects of running a business. No disrespect to anybody, but we have brilliant people that I speak to who are interested in that Bitcoin operating... Peter, you'd fall in that group, right?

But I sometimes think we have to start by actually getting the Ps and Qs in place with basic boring business fundamentals such as, "how are you going to organize yourself as a business?" For instance, "do you form as a corporation or a limited liability company, what are you going to do? How are we going to do basic things for the operation, the Bitcoin ATM such as where are you going to site it?" It's sort of funny, but our experience or my experience in dealing with clients who have been siting ATMs, is that it is location, location, location.

The same machine placed just a few blocks away, can turn overnight into a dog or a very profitable site, but we have to have leases. I also once took a call from a client who said, "my wife is going to shoot me if the criminals do not shoot me first" and what he was explaining to me is that in his operations of his Bitcoin ATM, the act of moving money into fiat currency, US dollars in this case, into an out of a kiosk location, made him a very vulnerable target in a particular city, which is not known to be one of the safer places in America.

We had to work with that old school business problem of figuring a way to allow him to load and unload the kiosk with the US currency. So there are some basic things, plus such things like "do you need to have a license to operate in the city of Chicago? Do you need to have some type of business license in the state of Iowa?" Or wherever you may be, some basic old school regulatory issues and legal issues to consider at the front end.

Then you can move into the issues that I think we should spend a little more time talking about, which are the regulatory issues that we often discuss about Bitcoin operations. Again, we're going to stay with just the Bitcoin ATM example for this discussion. The first one is federal, those are promulgated by the United States government and do we have obligations there? Then later we can talk about if there unique state obligations that a Bitcoin operator may have to comply with? But let's stay with the federal for just a second.

At the federal level, at the beginning, much was unknown and a lot of us were making very hard and difficult educated guesses, but now we have greater certainty in knowing what the federal government will expect of us under the federal laws. The bottom line is, if you are going to run a Bitcoin operation here in the United States Peter, you are going to have to register with FinCEN. Why FinCEN? Well the law that is triggered by this Bitcoin operation or Bitcoin ATM operation is known as the Bank Secrecy Act.

The Bank Secrecy Act is a law that applies to somebody who is a financial institution and that term financial institution is almost obscenely broad. I think there are 23 separate definitions of financial institutions, all the way from the traditional common banks, down to what is known as a money services business and that's where a Bitcoin ATM operator is going to fall within that pocket, the money services business and specifically as a money transmitter within that money services business universe

So if we are required to comply with the Bank Secrecy Act, what does that mean for you as an operator? The first thing you have to do is you have to register with FinCEN. I'm probably letting out a trade secret, but you don't need a lawyer to do that. It is an online form. It's a check list document. Honestly, anybody can complete it within 30 to 60 minutes maximum. You don't need to retain a lawyer to do that. We're happy to do that. It's an online form. If my memory is right, it's form 107 on FinCEN's portal and you simply go through and populate the information about your business in there.

You have to register. The downside of not registering I believe is a maximum federal criminal penalty of up to five years in prison, plus there's atrocious fines. Considering the the risk of spending 30 minutes of your time registering versus not registering and operating the business, I think it's a pretty easy decision to make. But when you register, that means that once you start running your MSP business, your ATM operation, you have to comply with the law and the main issue there is going to be compliance with the Bank Secrecy Act laws, what a lot of people call the anti money laundering portion.

The Bank Secrecy Act actually got started, I think during the Civil War, but it has a evolved over time Peter to be the primary tool that the United States has to fight organized crime and the laundering of money generated through criminal enterprise. But the AML or the anti money laundering program that a MSB, again, you as a Bitcoin ATM operator have to have a place, is set out and there are people like myself and others who regularly prepare these programs, but you have to have one. It's got to be on writing.

It's got to be printed off on a piece of paper and sitting in a file someplace. If or when somebody comes in and begins inspecting you, the AML program essentially touches on a couple of different points. You have to create internal policies for complying with the BSA. You have to designate a compliance officer within your organization. You have to train everybody who's going to be working in this space, to know what the Bank Secrecy Act requires and doesn't require.

You have to test the program, whether it's done through an outside testing firm or an inside operation, it depends upon the facts and circumstances and then you have to be able to reasonably identify the users, or your customers in our case.

Then you lastly have to file any reports that the Bank Secrecy Act requires, such as for example, currency transaction reports or suspicious activity reports or under the new OFAC guides which came out again, a couple of weeks ago, any reports regarding transactions which occurred, that violated OFAC or were with an individual that is found on one of those OFAC lists.

Peter McCormack: Well, so I've got an interesting question there then because I was looking into this and I previously had a lady on my podcast called Caitlin Long. I don't know if you're aware of her? She works out up in Wyoming pushing, I'm going to say cryptocurrency and Blockchain, forward.

Bill Repasky: And brilliantly so too. I've read her stuff and Wyoming is a very interesting state in our nation.

Peter McCormack: Yeah! So I'm going to be up there soon for her event, but one of the things she said to me, and I've just found the stat is that, of the 16 million suspicious activity reports that were received, they only resulted in 296 convictions, which is 0.002%. So it seems very low and therefore the rules seem very draconian for a very low conviction rate.

But then I asked the question, "is the low conviction rate because maybe there isn't enough information to prosecute on some of these things? Or is it that the Bank Secrecy Act and the guidelines act as deterrent or is it just the fact that this is draconian?" Do you have a view yourself on this?

Bill Repasky: I'm not a criminal lawyer and so I probably could not opine as to that conviction rate issue. I do want to suggest though to people listening to you, that if you have an obligation to file an SAR or suspicious activity report, do it! This is one of the areas where we see financial institutions including money services businesses, therefore including Bitcoin ATM operators, getting dinged with FD financial penalties from those regulators where you do not file SARs.

At the filing of a suspicious activity report puts data into the federal governments computer database where it's used in ways I am not privy to. Maybe it's for tracking, developing trends or analysis. Sometimes it's actually for running after bad guys, if I can use that broadly, but I can't draw the Lincoln, it may just be that they don't have the resources.

I do know for instance, this is not necessarily on point, but one of the issues about ATM operators, is we obviously have to follow BSA and not to confuse you or the listeners too much, but while FinCEN, that governmental organization is the primary regulatory body responsible for overseeing the Bank Secrecy Act, it is the Internal Revenue Service that has been designated as the agency that will conduct audits and exams of money services businesses, including their compliance with the AML program.

It's only in the last couple of months that the IRS, or at least it I've seen, the IRS starting to actually act as an examiner of ATM operators. We are now seeing IRS requests for examination going out. Those are fascinating in terms of what the IRS is asking and looking for during the exam process. This was in my opinion, essentially unknown and now we're beginning to actually see real world examples of what is being sought and solicited in the exam process Peter.

I don't want the IRS to come an audit me please, but I see that the IRS is sort of where some of the other regulatory authorities were two years ago. They haven't a clue! They're asking things that simply are not appropriate or relevant Peter, to a basic Bitcoin operator. Now they're asking for it and we're going to have to explain what we have and what we don't have and why we don't have it.

Or it could be, in all due defense to those guys, that the examiners are asking for everything because they are really not sure what they want to see yet. So therefore that's their job. I'm going to put our ATM operators through a tremendous amount of work and sleepless nights, because I'm not sure what I want to see and until I see it, well I'll know whether I wanted to see it or not. I don't know if that makes sense.

But we are seeing developments in this area and I think we'll have more information than before, as we watch a couple of these businesses go through the exam cycle .

Peter McCormack: So going back to wanting to be a Bitcoin operator, that's the first thing, you have to register with FinCEN and you have to submit Suspicious Activity Reports if you see them, but there are various other considerations as well, right? Also aren't they split between federal and state level?

Bill Repasky: That's exactly right. Let's take us back to the first conversation where you telephoned me about operating a Bitcoin ATM. The first thing we spoke about, is do you have a good old school business plan in place? Have you figured out your budgets etc. Then we talked about the federal registration and the other federal laws that might apply to the operation.

Then the next question I'll probably ask you is, where do you intend to operate, because depending upon where you will be operating your kiosk, there may be state law and regulations that have to be complied with. In this area where we will primarily focus, depending upon the state that you choose for your kiosks, whether we have to comply with what's known as a money transmitter licensing situation.

I always like to keep people on track by saying we're talking about the federal laws and regulations, we're calling about registration and what's required. If we're talking about the state laws and we're talking about licensure. Does the state require us to have a money transmitter license depending upon the facts and circumstances about your ATM operation?

As you already guessed or learned, that the states are all over the board on this, whether a ATM operator will have to have a money transmitter license and go through all the rigmarole, the time and expense necessary to obtain one.

Peter McCormack: In every state they operate?

Bill Repasky: Correct! I may know a thing or two about this, but I can guarantee you that if you told me that you wanted to operate in a particular state, I would still go back and immediately look at what has happened in the last day or two, because this is in a state of flux. Many states have passed laws that are becoming effective now on new regulations. I usually and often, will end up calling the head of the unit that's in charge of money transmitter licensing and say, "okay, I just read all this stuff. I read your regs, I read your guidance, yada yada. What's your position on all this?"

Because everything changes and you can't count on what you knew yesterday still being true today in all cases. For instance, you spoke about Wyoming. Wyoming has made the public policy decision to be one of the most crypto friendly states in our union and they've done some wonderful stuff out there to assist in this area. But then you have other states, let's say New York for example, who you talk to these guys, they tell you "we are crypto friendly", but anybody who has tried to go through the Bitcoin licensing process will probably have a different position as a business person.

Now, in fairness to the regulators in New York, they say "we want to create a level playing field. We do not want the flim/flam artists or con people playing in our space and doing injury to our citizens. So our regulatory structure actually helps the honest and legitimate businessperson." But moving through that New York process has been very, very difficult and very expensive to comply. Now, having said this, just in the last week or so, at the New York State Department of Financial Institution, they reorganized themselves to create what's known as a research and innovation division.

This is the group that's going to be responsible for virtual currency businesses in the empire state, the state of New York, including the Bitcoin licensing. So it appears that they're collecting the people that know this area, want to be in this area and perhaps make it better or it's just maybe a bureaucratic shuffling in state government and nothing will change. But that's a new twist in the New York Bit-licensing and I don't want to just pick on New York, because as I've mentioned earlier, New York believes that it is motivated by the best and highest purposes.

It just can be particularly burdensome to comply with the requirements necessary for a Bitlicense, but New York's not particularly alone. Depending upon the state, we've got to actually open up the laws and the regulations on a state matter to see whether we have to obtain a MTL, money transmitter license. For instance, and I'll give you one example, facts and circumstances can make a difference.

Let's say you wanted to operate in the state of Texas. You may not have to have a money transmitter license if you do wall-to-wall exchange, meaning that you're essentially just loading cash into the kiosk and loading your own coin for sale to your customers. But if your kiosk hooked up to an exchange or if your kiosk allowed for the conversion of one virtual currency for another, then it is likely under those facts and circumstances that you are going to have an MTL in the state of Texas.

We just need to know what you're going to do and we need to talk to the regulators. If you do happen to have to have a money transmitter license, this can be honestly a significant deterrent to operating in that state and it needs to be part of your business plan. For example, there's probably going to be a fee charge, nonrefundable, $250, $500 whatever the state may say, "this is the license fee and once you get a license Peter, you're going to have to renew it", usually on an annual basis. That may be somewhere between another $250 to $500 to $1,000!

Peter McCormack: And that's going to stack up if you are operating nationwide!

Bill Repasky: Well that's right! Or if you just want to run one kiosk at a university, it makes it pretty hard to develop a successful business plan, with that type of regulatory expense overhead. But Peter, I just want to run down a little bit more of some of the issues as to why this is something you should consider about operating your kiosks. Do you have to pay a fee just to apply? Applying doesn't mean you're going to get the license, but applying annual fees, are you going to have to have a minimum net worth for your business entity?

Are you going to have to post some type of security? Are you going to have to present the state licensing group with information about your business, such as have you ever been convicted of a crime? Tell me about your articles of incorporation etc. Do you have to have a minimum net worth? Do you have to, I think I mentioned post securities and I've got my eyes closed Peter trying to think of some standard ones, but maybe depending upon the type of the facts and circumstances of your operation, you may have to post some type of security bond with the state.

That can be... It's a large dollar bond in some instances, depending upon the facts and circumstances. But let's say that you need to post a $250,000 performance bond, if that's what the state calls it. That doesn't necessarily mean that you have to find $250,000 and turn it over, but you have to post a bond. You have to work with a bonding company to buy that "insurance." But your point was the one I've been trying to make, these things can nickel or dime or dollar or hundred Dollar you, so to speak, into submission, depending upon the state where you want to operate.

That's why we are increasingly seeing larger operations, who can spread that overhead cost over a larger number of kiosks, entering in the space, which taking us back to one of the first points we discussed, kind of gets in the way with my libertarian sense that the Mom and Pop kiosks may be more difficult to consider as a viable business model, given the regulatory costs associated with operating in the space.

Peter McCormack: I wasn't even thinking about it at a granular single unit level. Actually, the kind of area I was going to go into, is saying does this need to be something that is federally regulated? Because if you are operated in multiple states, do you really want to be applying for 50 plus licenses? Would it make sense just to apply for one nationwide?

Bill Repasky: It would make sense. Is it possible that that will happen in the future? I'm not sure that that is possible. Now please understand, I am not disagreeing with your point, that it makes sense. There are a number of states that are entering into what are called Compacts, meaning that if you are a money transmitter license in one state, then our state will recognize that money transmitter license, so you don't have to go through the same process again.

But our government is one of federal and state authority and we have a terribly long history of state authority in the money transmitter space. Plus we have a lot of bureaucrats in the 50 states that depend on the fact that they can run their own little fiefdom and generate their own fees and they want to stay employed.

So I think you'd have a lot of political pushback, despite the fact that in our space, the virtual currency space, do state money transmitter laws really make a lot of sense? I mean that is a philosophical, political discussion that we should have, but for the time being on this call, I'm kind of drawn back to the realities of the situation for us.

Peter McCormack: Okay, so how onerous is a money transmitter license? Is it more about some kind of background check or are there actual other requirements that you have during the length of the license? Let's say it's an annual license, are there things that you're required to do during that year?

Bill Repasky: The answer to that is honestly, yes. Now, I hate to sound like a broken record, but it does depend upon the state, but Peter, almost uniformly, if you're going to have to obtain a license from the state, an MTL, there will be the due diligence process of background checks. There will be ongoing compliance obligations regarding transactional volume for example. Those types of administrative burdens, due diligence burdens and the financial burdens that you and I have begun to talk about, do you have to pay money to get your license renewed?

You have to keep a bond in place. You have to maintain net worth. You have to have collateral. Or is it like Hawaii? Hawaii law essentially requires like a reciprocal account funding demonstration, that you have funds equal to the amount of which the transactions are occurring. Right now I believe and a Hawaiian regulator may step in and correct me at any moment, but I believe that applies to a Bitcoin operator if you want to open your kiosk on the beach in Waikiki.

However, it shouldn't Peter and this is my philosophical approach and not what the law is as I understand it, we have seen notable exchanges leave the state of Hawaii for the very reason they find compliance with this law burdensome. But the law shouldn't apply because for instance, your ATM or your Bitcoin Kiosk is a classic example of a counterbalancing transaction. You have put in US currency in x dollars and you have walked away with virtual currency in an exact x dollar. We're not holding custody of anything.

We don't need to protect the consumer because the transaction was completed, it's over and done with. But for the time being, Hawaii is one of those difficult states from a state licensure piece. That didn't answer your question did it about due diligence! But yes, you will have to produce information, they're going to probably run a criminal background check on you, if you're the owner of the operation, that has applied for the state license.

So I'll make sure that your investors or anybody who's a member of your LLC for example, if you are an LLC, is relatively clean from a criminal background check etc.

Peter McCormack: I've got another question for you, because I guess one of the things that is to the advantage of an ATM operator, I would have said would be, if I was operating an ATM in Chicago, the person coming to use the machine is in Chicago, the machine is in Chicago and the transaction happens in Chicago. So strictly speaking, they probably only need a MTL in Chicago.

But then strictly speaking, the actual transaction itself happens online, it happens via the Internet, which means the actual transaction operates... Well you can't actually tell where it operates, because there's a distributed ledger. If the ledger appears on a node in every state of the country, where does it actually fit with the regulations?

Do they keep it simple and just say, "look, the ATM is in Chicago, you are in Chicago, so you only need a Chicago license" or are there considerations for the fact that the transaction itself is happening across the Internet?

Bill Repasky: The simple answer is they consider the money transmission event if you... No, Illinois is actually a fairly favorable state for virtual currency businesses. They saw it early and there are states worse than that. But let's stay on your question, which wasn't specific about Chicago. At the state level, they will consider the money transmission event, that exchange that happened right at the corner of 3rd and Lake in Chicago, as the seminal event, despite the fact that the virtual currency and there are so many other instrumentalities involved in this, they'll keep it simple and say, "we don't care."

Now we mentioned Texas for example, if your kiosk was hooked up to an exchange, you are actually not loading coinage into the kiosk, but rather you're essentially buying on the spot market, to use a different phrase, often to exchange, there you do have those instrumentalities that you're talking about. 

But most certainly you will need to get a state level money transmitter license, even though you are actually transmitting currency or Bitcoin about two feet from the guy standing in front of your kiosk, to the kiosk or vice versa, depending on whether you buy and sell currency at your kiosk. So they do keep it simple in that analysis.

Peter McCormack: Right okay, fair enough, because for exchanges they have kind of a bigger issue that they have to consider having an MTL for almost every state, maybe some block out New York because of the Bitlicense. So we have to register with FinCEN, we have to have an MTL in each state that we operate in potentially. Are there any other regulations that an operator has to follow?

Bill Repasky: Well Peter, I'm going to say that you do have to have a local license to operate. Just kind of the nuts and bolts of actually turning on the lights at the location, turning them off at night so to speak. But essentially if you, as an operator, comply with the federal Bank Secrecy Act's requirements for money services businesses, and then if you comply with the state level licensure requirements, as needed in the states of operation, then you've pretty much solved all those issues that you need, unless last by chance you are working with an exchange.

I will tell you that a lot of our operators will tell you that it's becoming increasingly hard and difficult to be an operator and working with an exchange. But the answer to your question is knowing you've got 95% of what you need done, other than the local licensure or maybe you need to have a state license to run a business.

You have to pay taxes, as a corporation stay registered in your state and all states do require businesses operating in their state to register usually with the Secretary of State's office. But that happens a thousand times a day, whether you're a tyre store or a Bitcoin operator. That kind of stuff is very doable and clearly manageable.

Peter McCormack: It sounds like a lot of bureaucracy! It sounds like it could be quite tricky and there could be some missteps along the way. I guess you can't really do this without some kind of legal support, which is probably why Frost Brown Todd has moved into this area, right?

Bill Repasky: Well, yes.

Peter McCormack: You're allowed to sell Frost Brown Todd right now!

Bill Repasky: I know! Now I will tell you that in our space, we're beginning to see independent compliance shops that are working with you in that space. For instance, when we get involved in money transmitter licensure, we can lay out the framework. We've got a touch base A, B, and C and this is how we've got to comply with this and we work with the business. But sometimes it makes sense if you have to walk through the halls of the state capitol in Iowa. They have a money transmitter license consultant assist you in that.

So yes, you should not enter into this space without having a clear picture, generally gained through a lawyer about what laws and regulations you have to comply with. But how you go about complying with those laws and regulations, that's where, for instance in our business, we have an outside consulting firm, that we negotiate rates with who know the folks in the state who issue these licenses.

They can go up, shake hands and have lunch with them if the state laws permit so to speak, but who knows how to get around the hallways and can help at a lower price point than a lawyer could getting that done. But Peter, I do appreciate the offer of a pitching Frost Brown Todd, because I think we have a lot of very smart guys working on our Blockchain team.

We really do. There are places where a lawyer can add real value and there are places where, as an operator, you can go off and do a lot of work on your own. Or maybe you can find a consultant to help on some pieces of administrative level work, that might be more economical for you.

Peter McCormack: Well listen, any guest that comes on the show gives up some of their time and deserves the opportunity to at least mention their company. So that's not a problem at all and every previous guest has had that opportunity. Can I tell you the one thing that surprised me about the ATM industry? So I was surprised that you could buy or sell up to $3,000 a day. I was just very surprised about that and I don't know why. It just seemed like a very high amount and I thought that's kind of impressive really.

Bill Repasky: Well technically, I believe you could buy or sell $1 million a day. You wouldn't want to and your customer wouldn't want to pay the commission or the brokerage, whatever you want to call it, the interchange fee, that you would assess from your ATM and you'd probably blow up the ATM itself. But when you get above $3,000, you have certain reports to file. When you get above $10,000 in a single transaction or a series of structured transactions, you have certain reports.

The $10,000 threshold is the currency transaction report threshold, which itself was now under discussion. But most of the operators that we work with have, a tiered system and most of those tiers cut off the transactions that can be conducted in a single sitting, so to speak, or over a course of a certain period of time at different levels and many choose the less than $3,000 level, because they don't want to get involved in the paperwork of filing the necessary reports.

Peter McCormack: Right, I understand. So is there anything specific that manufacturers of ATMs have to think about?

Bill Repasky: Well, I will tell you that we serve as legal counsel for one of the world's largest manufacturers and I do believe that they need to think about this. The kiosks themselves, the hardware inside them, has to allow for the inputting of data that is necessary to comply with the federal laws. Generally, that means information and you need to have an interactive surface of course, that allows your ATM customer, to input data and receive data necessary for the transaction.

Do you have a multi-factor system of identifying the user of your machine? Are you able to have the user of the machine, your customer, input data about him or herself where needed for your kiosk threshold? Does your machine, the kiosk, allow you to outflow the data to vendors that you may work with, to do things such as to check the OFAC list, to check lists against databases that you may want to run the customer through. Let's say he inputs his license as part of the kiosk, what do you do with that data?

Well, you're going to collect the data and you're going to hold onto for five years because that's what the Bank Secrecy Act requires. But you may also need to verify or KYC, know your customer, and in that KYC term, that's essentially called a CIP protocol, which is the Customer Identification Protocol. So yes, the kiosks need to provide that type of functionality to the operator, so that they can run a compliant business.

Peter McCormack: Okay, is there any other areas of regulation that I've not asked you about, that needs to be considered or have we covered all bases?

Bill Repasky: I always hate to use the word "all" Peter, because we're always surprised. However, in this instance I will use the word "all". I think we've touched upon all those issues. We can probably spend a separate podcast on just the Bank Secrecy Act issue or we could spend a podcast on California, New York, the various states licensure issues. We certainly have touched upon all the salient points that I think we should cover this morning.

Peter McCormack: Great! Okay, well look, final couple of questions. Are there any new initiatives that are being worked on or that you're aware of that anyone working in the ATM industry should be aware of?

Bill Repasky: The answer off the top of my head is, no, at the state level. Again, I do recommend at the federal level to get hold of the latest May 2019 guidance and to take a look at that. Depending upon the state level licensure question, to take a look at that, because there are laws that are coming on board, regulations that are being written and re-written regularly. But no, nothing that comes to mind in that area.

Peter McCormack: All right, well before we finish off and say goodbye, the final thing you should do is, you should use this time to tell people about Frost Brown Todd if they are interested in operating an ATM business and how they can get in touch, how they can get hold of you and why they should speak to you?

Bill Repasky: Well Peter, thank you very much for that opportunity, I do appreciate it. Again, my name is Bill Repasky, I can be found at the Frost Brown Todd law firm's website and you can see my handsome picture there and all my contact information, but my email is brepasky@fbtlaw.com.

I do recommend that anybody interested in the Blockchain space and starting a business there, whether it's an ICO all the way down to a Bitcoin operator or all the way up to a Bitcoin operator, find counsel who is familiar with this space, people who have actually run people through the various aspects of what they want to do with their business operation and get competent counsel early on so that you can see before you commit too much of your family or personal finances into the operation, what the entire picture is going to look like.

Frost Brown, Todd, as I mentioned at the beginning, we have tried to assemble experts in various areas. I guess as a lawyer, we're not allowed to say we have experts, but we have assembled lawyers who have experience in the various areas of the legal practice that are commonly and necessarily encountered by virtual currency business operations, from their formation all the way down to the actual operations for each of the businesses.

Peter McCormack: Fantastic! Well Bill, look, I have to say I appreciate your time. I know we had some fun and games trying to schedule this, but I do appreciate it. I know you're busy and thank you so much for coming on the show.

Bill Repasky: Well Peter, I've certainly enjoyed talking to you. Please let me know if there's ever anything we can ever drill down off the podcast into any issues. I am actually due out in about 15 minutes to start working on the newest craze in America, the hemp and the marijuana industry.

Peter McCormack: Yes, I covered that recently, because they're obviously struggling for banking services!

Bill Repasky: Oh, I got to tell you, I think that is a real opportunity for a business person who can figure out how to do this. There are many new initiatives. There's a couple that are just capturing the news because sitting around with boxes of cash in your back room, is not only not healthy for you, but it's a genuine public safety concern and because I do so much work with the regulators, just as a fun point, I was talking to a regulator who's responsible for banking in Colorado, Peter.

They were called on the carpet sometime ago for making a purchase of laundry machines and why in the hell, to use the term, would a bank regulator need to have dryers and buy dryers? Well the problem is Peter, the the US dollar bill, $5, $20, $100 dollar bills, reeked of marijuana! So before they get put in circulation, they had to try to fumigate it some way. So here you have a banking regulator doing laundry or using a dryer!

Peter McCormack: Sounds like our next show! I like to do them in person, so perhaps when I'm in, did you say Louisville Kentucky?

Bill Repasky: In Louisville yes, but our Frost Brown Todd's offices are in many states, so we could get to wherever you are, if it's more convenient.

Peter McCormack: Well I'm sure we'll find a way. I wish you good luck with the business and again Bill, thanks for coming on.

Bill Repasky: Peter I enjoyed it very much and thank you very much for your patience this morning, as we were getting booked up, I do appreciate it!

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