The UK’s financial watchdog has made a lot of noise about its strategy on crypto ATMs over the past year, with actions taken in the first few months of 2023 proving how serious the regulator is about clamping down on these illegal machines. Alexandra Leonards, news editor at FStech, reports.

Over the past few years, several hundred crypto ATMs have been stealthily operating in newsagents, coffee shops, and even fast-food establishments across the UK. Just as the pandemic was kicking off in Spring 2020, it looked as if these illegal machines were beginning to gain traction – with government figures showing that the number of Cryptoasset ATMs (CATMs) in the UK jumped from just 35 in 2016 to 271 in April of that year.

CATMs were highlighted as a particular concern by HM Treasury and the Home Office in a national risk assessment published around the same time. In the report, they describe these machines as potentially more vulnerable to abuse by criminals and money launderers. In fact, the National Crime Agency has seen evidence of people increasingly making use of crypto ATMs to launder illegally obtained money. Unlike traditional money exchanges where cash is typically transferred to the exchange through a bank or other payment system, these internet-enabled ATMs allow criminals to convert the physical cash proceeds of crime directly.

The Financial Conduct Authority (FCA) took just over a year to act following the publication of the assessment, but when it did the regulator sent a clear message to cryptocurrency businesses. And after the authority demanded firms shut down their unregistered ATMs in 2022, the winding down of Britain’s CATMs has moved at an impressive pace.

How do crypto ATMs work?

CATMs allow consumers to buy or convert cash into cryptoassets but, despite their name, have no link to traditional banking.

“The ATMs really are extended mobile crypto wallets,” says Raghavendra Rau, professor of finance at Cambridge Judge Business School, University of Cambridge. “All they need is a note reader – if they take cash – to check the cash is not counterfeit, a safe to keep the money in, and an internet connection to update the transaction on the blockchain.”

While it is not strictly against the law to purchase a CATM, it is illegal to operate them for business purposes unless they have been registered with the FCA, which – to date – none of them have.

Ultimately, operating any cryptoasset activity without registration carries a maximum sentence of two years in prison.

The short-lived rise and fall of CATMs

It wasn’t until last year that the FCA sprang into action, making it abundantly clear that none of the crypto firms registered with it had been given permission to operate crypto ATM services. It told firms to shut down their machines or face enforcement action as anyone operating these machines was doing so illegally.

Since then, the regulator has been clamping down on operators that have decided to ignore its demands by using public data and intelligence to identify where remaining machines are located. Meanwhile, the FCA has formed partnerships with law enforcement to find these CATMs and other unregistered cryptocurrency businesses.

With the number of bitcoin ATMs operating in the UK dropping from 81 in March 2022, to just 18 last month, it is clear that the FCA’s tactics are working.

And its efforts weed out any final stragglers has been palpable this year. In February, the regulator announced it had gathered evidence from several sites around the city of Leeds as part of a joint operation with West Yorkshire Police’s Digital Intelligence and Investigation Unit. It issued warning letters which requested the operators to cease and desist, explaining that any breach of its demands would result in an investigation under money-laundering regulations.

A month later, the FCA told the public that it had inspected several sites in East London suspected of hosting illegally operating crypto ATMs in partnership with the Metropolitan Police. At the time, the regulator said it was sending a “clear message” to firms that it will continue to identify and disrupt unregistered crypto businesses in the UK.

Despite the FCA’s initial delay, its actions demonstrate a refreshing and arguably rare example of a regulator stopping a growing risk in its tracks. With the FCA’s strong warning to crypto firms and direct action alongside law enforcement, it looks increasingly likely that we will see the back of the vast majority of crypto ATMs before the year is out.

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