State proposal aims to fight fraud by regulating crypto kiosks

METRO DETROIT/LANSING — A bipartisan proposal currently in committee in the state Legislature aims to crack down on scams at virtual currency kiosks — machines that are ubiquitous but undocumented, and where stolen money is rarely recovered.

There are two bills. House Bill 5469, by state Rep. Joe Aragona, R-Clinton Township, would require the kiosks — commonly known as cryptocurrency ATMs — to display clear warning labels alerting users to scams, and to establish a waiting period for first-time users so that there is more time to stop transactions if fraud is suspected.

House Bill 5470, by state Rep. Mike McFall, D-Hazel Park, would amend the state’s Money Transmission Services Act to include virtual currency kiosk activity under the existing regulatory framework for money transmission businesses. This would subject operators to the same compliance requirements as other financial services in Michigan.

“The state of Michigan doesn’t regulate a lot of stuff when it comes to financial services since so much of it is federal, and with these cryptocurrency kiosks, they’re not regulated at all,” McFall said. “There’s nobody saying when they must pick up money from them, or that they must have security, or even where they’re located — we have no idea, really. Anyone can put them in a store if the store allows it. So one part of this legislation is to make (operators) provide documented locations.”

Corey Haines, the police chief of Eastpointe and former police chief of Madison Heights who now serves as mayor of Madison Heights, confirmed cryptocurrency ATMs are a major blind spot for cities and the state since there is no record of how many are out there, where they’re located or who is operating them. Anyone can set them up in a store if the store allows it.

He said many people assume that a machine that handles financial transactions in plain sight must be legitimate, but that’s not necessarily the case. And if there is a scam at the machine, getting the money back can be nearly impossible.

“We don’t have any knowledge of where these machines are operating, other than when we locate them or someone tells us,” Haines said. “The biggest problem is crypto is not traceable or trackable. What we’ve seen happen is someone falls prey to a scam where someone tells them they need to deposit X amount of money (at an ATM) to get a relative out of jail, and once they make that transaction and put their money in the ATM, it’s gone, and it could’ve gone anywhere — usually overseas. That makes it impossible for law enforcement to get it back and make the victim whole again.”

McFall and Aragona recently testified before the House Regulatory Reform Committee, describing the urgent need for consumer protections on cryptocurrency kiosks. They were joined by Sterling Heights Police Chief Andrew Satterfield and Sterling Heights Assistant City Manager Dale Dwojakowski, who discussed efforts by their city to protect against cryptocurrency scams, including a local ordinance adopted in January after police noted multiple instances of fraud costing victims more than $500,000 combined, most of them senior residents.

The Sterling Heights ordinance places daily and monthly transaction limits on cryptocurrency kiosks in the city, requiring business owners with machines on-site to obtain licenses from the city, among other things.

“It’s a start, but the reason we want to do this statewide is because (cryptocurrency ATMs) are popping up statewide,” McFall said. “Right now, it’s just a patchwork of places regulating it, and thieves will just redirect (victims) to other places.”

Also testifying in favor of the House bills were industry representatives Chris Edwards of Bitcoin Depot and Larry Lipka of CoinFlip, two of the largest cryptocurrency ATM providers in the United States.

“These are the ones that are on the up and up,” McFall said. “They’re legit companies, and the bad companies make them all look bad. So they want to rein in the ones who are scammers, since it spoils the whole bunch and makes the whole industry look untrustworthy.”

In a statement, Aragona said that seniors have been especially vulnerable to the scams.

“This legislation cracks down on fraudulent actors who exploit these machines while putting clear rules in place to protect consumers and ensure responsible operators can continue doing business in Michigan,” Aragona stated.

Haines said artificial intelligence has made the scams more sophisticated. For example, fraudsters can use AI systems to find sound clips of a victim’s loved one on the internet and then use those clips to condition the AI so that it can impersonate the loved one’s voice and personality.

The AI can then call the victim and hold a real-time conversation where it claims they’re in jail or some other predicament, directing the victim to send money via a cryptocurrency ATM.   

“Remember: Law enforcement agencies will never ask you to go deposit money anywhere,” Haines said. “And when you’re talking to somebody, be sure you know who you’re talking to — people calling from anonymous or private numbers may be scams, and legitimate businesses and government agencies won’t ask you to make payments at kiosks in a store.”

He also said to avoid clicking links in text messages and emails from unfamiliar sources. Another tip is to ask solicitors for their name, title, organization, and a callback number, and then look up their organization — whether it’s a business, utility company or government agency — and call that organization yourself to verify that the solicitor and their request is legit. When in doubt about someone, contact your local police department to ask for help.

“I applaud Rep. McFall and Rep. Aragona in taking this situation in hand and trying to get some legislation passed that will protect not only our seniors, but anybody that is not familiar with cryptocurrency and how these machines operate,” Haines said.

Staff Writer Gary Winkelman contributed to this report.