As digital assets roar back into the mainstream after an extended period of price declines, experts are warning about the risks of financial predation baked into of the industry’s most analog expressions: machines that convert cash to Bitcoin.

Bitcoin teller machines, or BTMs, are physical kiosks that offer customers access to crypto conversions and are commonly located at gas stations, liquor or convenience stores and other places you might find a traditional automated teller machine for credit and debit cards.

The BTM industry surged during the pandemic: The number of installed units increased more than five-fold over four years to about 31,100 units nationwide, according to Coin ATM Radar. But a closer look into the BTM boom revealed that the machines are often disproportionately located in areas with a majority of Black and Latino residents, charging fees as high as 22% per transaction.

Bitcoin Depot, the largest US operator with about 7,300 BTMs as of April 8, charges some of the highest fees in the industry while touting financial inclusion, a concept that ensures that all customers, regardless of their socioeconomic standing, have access to such financial services as savings, credit and insurance. Over 80% of Bitcoin Depot’s customers earn less than $80,000 a year, according to a November 2023 investor presentation from the company.

“It looks like a good thing, but there’s a whole lot of downsides to it,” Franklin Noll, a lead payments specialist at the Federal Reserve Bank of Kansas City, said. “It’s like a payday lender saying ‘I can give you cash today for your check. I’ll charge you 25% or 30% for it, but here you go.’”

A Bloomberg review of Bitcoin Depot locations and data from the Census Bureau shows that states with proportionally large Black and Latino populations tend to have more of the company’s BTMs, especially in southern states like Georgia and Texas. Bitcoin Depot President and Chief Executive Officer Brandon Mintz dismissed any suggestion that the company targeted areas with underrepresented groups in deciding where to place its machines.

“Never in our history have we once targeted an area based on any sort of racial profile,” Mintz told Bloomberg News. “Our focus is targeting areas that have low competition and that have populations that can support a Bitcoin ATM profitably.”

Placing the BTMs often requires the cooperation of local shop owners, though some are available at major gas stations and convenience stores like Circle K, Cumberland Farms and Jacksons Food Stores. Some machine operators pay the stores a small fee for the floor space. In other instances, store owners rent the machines from the operator.

Calls to stores in states across the country — including California, Indiana, New Jersey, and Maryland — yielded little knowledge about the BTMs. When asked how long the BTMs had been installed, the number of people who used them each day or about the kiosk’s transaction fees, workers deferred questions to store owners, who weren’t in, and rarely knew how the machine worked.

One restaurant owner in Essex, Maryland, who declined to give his name, said Bitcoin Depot paid $145 a month for the kiosk that was installed a month ago. Another store owner in New Jersey, who identified himself only as Jai, said his store received $200 a month for the kiosk, also operated by Bitcoin Depot.

A spokesperson for Bitcoin Depot said that the company encourages store owners to have kiosk users reach out to the company’s customer service directly should they have questions about the BTMs.

Fees at these BTMs vary from operator to operator; some include a flat transaction cost on top of a percentage fee based on the size of the transaction. Partly as a result of these fee structures, some researchers have described the BTM industry as a form of “predatory inclusion,” where a business helps customers get access to a service in exchange for a high, sometimes hidden, cost.

In Alabama, the concentration of Black and Latino residents within a mile radius of Bitcoin Depot BTMs is 20 percentage points higher than the broader state average, per a Bloomberg analysis of location data and the 2022 American Consumer Survey. In Dallas, BTMs are consistently located in areas where the highest percentages of Black and Latino people live.

States in the Northeast, including Connecticut and New Jersey, show a similarly strong relationship. The West and Midwest have notably less pronounced connections. Filings from Bitcoin Depot have stated that “demographic data” is a consideration when deciding where to install new machines. Mintz said that when the company refers to demographic data, it’s only referring to “population and population density.”

Proponents of cryptocurrency often tout the asset as a way to reach unbanked people, who lack a more traditional bank account. In the US, that comprised 6% of adults in 2022, per the Federal Reserve. Black and Hispanic people were more likely to be more unbanked than their White counterparts.

A paper published by the Brookings Institution in October 2022 suggested the narratives that crypto can serve people without adequate access to physical or digital banks, as well as close racial wealth gaps through investment are often conflated.

“Until more evidence is available regarding the technology’s progress or adequate consumer protections, policymakers should be wary of claims that crypto will bolster financial inclusion,” Brookings Metro fellow Tonantzin Carmona wrote.

BTM industry practices are “very consistent with predatory financial services” including payday lending and subprime loans that target Black communities, according to Dr. Jocelyn Evans, the Henry W. Bloch endowed professor of finance and an associate dean at the University of Missouri-Kansas City.

“I don’t know how they’re helping the underserved community by giving them something where the cost is so excessive and it’s so hard to convert it back to cash and you’re almost guaranteed to lose money,” said Evans, whose pending research report identified “a pattern of ethnic targeting” in the placement of BTMs in Kansas City. The report’s scope included all BTM machines in the city and did not focus on Bitcoin Depot.

Employees at local stores weren’t aware of what the fees were on the BTMs. John Carlo Giovanni, a manager at Buy Rite Liquors in Ventnor City, New Jersey, said a machine tech once offered to walk him through how the machine worked, but that would require depositing at least $20 to walk through the whole process. (The BTM at Buy Rite allows for purchases between $20 and $25,000.) The manager at Marrazzo’s Market in Ewing Township, New Jersey, said he didn’t know what the store’s BTM transaction fees were.

On Bitcoin Depot ATMs accessed by Bloomberg, finding out what that fee might be required beginning a transaction. Typically, customers are prompted to confirm that they want to proceed with their purchase once they’re notified of the rates, the company said.

Mintz, the Bitcoin Depot CEO, said the percentage of a transaction the Atlanta-based company retains as its fees is typically in the “low twenties,” but would not provide a bottom or top boundary. “Nothing’s definitive, it just depends on the market and what we need to do to cover our expenses,” Mintz said. The company also charges a flat $3 fee on every transaction, and became the first in the industry to IPO when it merged last year with a special purpose acquisition company at a price of $10 per share.

Mintz also said that operating expenses are a core contributor to the fee structure, and that the machines’ physical presence is a selling point for customers. “There are many other places where people can buy Bitcoin with lower fees, many options,” he said. “We are an option that is a lot more convenient.”

CoinFlip and Bitstop, Bitcoin Depot’s main rivals, charge transaction fees as high as 22%, depending on the location, according to company representatives and customer service agents. CoinFlip also charges a “network fee” of $2.49 on every transaction.

The grocery store manager in New Jersey said his kiosk, which is operated by Bitcoin Depot, was installed last year by the store owner who is now deceased. Though there’s “very little” foot traffic generated by the BTM, Jeff, who withheld his last name, doesn’t see the efficacy in removing it – it doesn’t take up much space, and Bitcoin Depot pays the store a monthly stipend for its presence.

The liquor store manager, meanwhile, said about four to five people use their machine each day. “There’s a few people who shop and then use it afterwards, but a lot of people who know that we have it, they come in, and they see it, use it and leave,” he said.

The company has a pending application to operate in New York, which they say they expect to have approved by the end of June this year. The market in New York could allow for an additional 2,500 to 3,000 BTMs. Hal Goetsch, a senior analyst at B Riley Securities Inc. who covers Bitcoin Depot, said the pending license application could lift the size of the company by 30%.

“It probably could be the best market they’ve got,” Goetsch said, citing the state’s density, immigrant population and number of residents who might send remittances to family members abroad.

The New York State Department of Financial Services, which oversees the application process, declined to comment.

Aaron Klein, a senior fellow at the Brookings Institution’s Center on Regulation and Markets, said any expansion of Bitcoin tellers, regardless of the company, serves more as marketing than as proof of use. The majority of BTMs — 92% of machines in the US, as indexed by Coin ATM Radar — don’t allow users to sell their crypto in exchange for cash.

“Bitcoin is an asset masquerading as a payment instrument,” said Klein. “And it's dangerous if you can buy something but can't sell it.”

This article was provided by Bloomberg News.