From Seeds to Weed, Bitcoin Finds Home Where Commerce Goes Gray

It’s no secret that, in an effort to ease the concerns of global regulators and secure lucrative partnerships in the IT and banking sectors, the “bitcoin industry” has over the last year been on a steady campaign to rebrand as the “blockchain” or “digital asset” industry.

But as much as the bitcoin industry would like to distance itself from associations with drugs and crime, the technology still remains both popular with, and popularly associated with, those involved with such activities.

In process of writing a forthcoming book, I embarked on a 48-state research effort last summer to learn more about money and finance. Far from the headlines, I would meet only a handful of people that used bitcoin.

And nearly every time it was for drug sales, both legal and illegal.

In South Carolina, a man who camps out during the week behind a hostel struck up a conversation, drawn by the bitcoin decal on my car window. Sure enough, Dave, a married man in his 30s, didn’t learn about bitcoin in The Wall Street Journal. Dave sells Kratom, a tropical Southeast Asian plant known for its opiate-like effects for pain and anxiety relief, online in exchange for bitcoin.

Similar to the emergence of salvia in the US nearly a decade ago, the psychoactive plant has been banned in several countries, and in the US many states have legislative proposals to ban the substance in various forms of development.

(Kratom is currently legal in 45 states, excluding Indiana, Wisconsin, Tennessee, Alabama and Vermont, and legislation is pending in other states after several government agencies issued alerts and guidance.)

In South Carolina, Kratom, while a gray area, remains legal. But, the example shows that bitcoin’s most impactful use cases today are operating in the gap between what’s legal and what’s frowned upon by regulators.

Bitcoin seems just as popular as a payment method for marijuana purchases in Colorado. According to an associate at a dispensary in Colorado Springs, a city that only allows medical marijuana sales, one customer comes in weekly and purchases marijuana using bitcoin.

Another sales associate was unclear what merchant processor the dispensary uses to accept the bitcoin payments, but she said that there’s a $10,000 limit for bitcoin transactions per month.

Notably, she said the customer routinely spends this amount in a given week.

Bitcoin ATMs

As cryptocurrency becomes more popular, online bitcoin brokerages and exchanges have certainly gotten more stringent as it relates to regulatory compliance. While it used to be possible to purchase bitcoin while providing few personal details, a know-your-customer (KYC) check has become an industry standard for these companies.

But bitcoin is still an open platform, and the protocol makes no distinction between users. On the bitcoin blockchain, an address is an address, regardless of who owns it and how they intend to use any bitcoins they might possess.

Bitcoin ATMs, which operate like traditional cash dispensers, may play a role in keeping bitcoin the quick and accessible payment method as it was originally touted.

At one bar and restaurant in the US, owners told a story about how a customer knocked on the door of the establishment after hours asking servers to use the bitcoin ATM. When the servers said that the ATM shuts down when the restaurant does, the customer told them he’d give them $100 if he could still use the machine.

The situation highlights one of the reasonable grounds to suspect a money laundering or terrorist financing offense, according to the Financial Crimes Enforcement Network’s Suspicious Activity Reports (SARs). Offenses like these are a red flag and must be reported.

Stories like this seem more commonplace than acknowledged.

In Atlanta last year, a Lamassu Bitcoin ATM was stolen by two culprits brandishing a handgun from a smoke shop. While it’s unclear how much the robbers knew about bitcoin, there was speculation that they thought bitcoin could be extracted from the machine or that large sums of cash were inside, which is not always the case.

Whatever they were looking to achieve, it’s safe to say that they most likely weren’t looking to purchase bitcoin to investigate how it could cut costs in the back-end of their business.

Improving the system

Bitcoin ATMs were seen as transformative for consumer acquisition of bitcoin when the devices first appeared on the market, but they’ve become less fashionable over the past year because of complicated user experiences and compounding regulatory pressure.

Like most parts of the bitcoin economy’s infrastructure, bitcoin ATMs are evolving, and operators in the industry are looking to identify and correct these issues, while still enabling buyers to access bitcoin conveniently.

Aaron Williams, founder of Coinnections, is one entrepreneur who is seeking solutions to ease the KYC requirements bitcoin ATM owners would need to implement. Currently developming the beta for an anti-money laundering software product for cryptocurrency businesses, Coinnections’ creator believes US consumers will prefer bitcoin ATMs over bitcoin exchanges in the future.

“Bitcoin ATM operators benefit from their small size in that they can implement a true risk-based AML program,” Williams has said. “A true risk-based AML program can allow for lower identification thresholds while still allowing the user to buy a useful amount of bitcoin. ATM operators can also benefit from not having to comply with multiple regulatory regions.”

Though it might seem that the use of these machines has slowed, several Bitcoin ATM operators who wanted to remain anonymous said they’re still pulling in large amounts of cash from underbanked minorities.

Gil Luria, an analyst focusing on bitcoin and blockchain at Wedbush Securities, believes that bitcoin ATMs may play a key role in other less controversial gray areas of the financial system, such as helping the underbanked and migrant workers.

“The main use case for a bitcoin ATM is a consumer that wants another level of anonymity since linking bitcoin wallets to a bank account or credit card defeats the purpose. Funding a bitcoin wallet with cash may be helping these consumers maintain their privacy,” he said.

How the bitcoin ecosystem will develop along this fine line remains an ongoing narrative in the industry, though it’s one that, for now, might not have the benefit of venture capital or big bank investment.

Out of this association with crime has come the “blockchain without bitcoin” movement that has found regulated, risk-averse financial institutions and enterprises opting to build their own blockchain protocol without the bitcoin currency riding on top.

But whether or not bitcoin is used for the gray areas of commerce, it still stands as the only blockchain project that is currently in the wild and innovating on the clunky traditional payments process.

Bailey Reutzel is a veteran finance reporter, most recently covering the intersection of tech and finance for PaymentsSource.

Her latest project Moneytripping is a Gonzo-style journalism project focused on exploring money, politics and finance in America.

Bailey Reutzel (@BLR13) | Published on June 5, 2016 at 16:47 BST