Bitcoin ATMs Arrive in Los Angeles! Part Three, Interview with Cailen Sullivan and Melissa Rosen Rob MitchellAugust 19, 2014 One of our Spelunkin field reporters, Rob Mitchell, was good enough to give us a thorough review of the first Bitcoin ATMs in Los Angeles. In Part One, he gave us an overview of the event and in Part Two, he covered the details of actually using the machine. Here in the final segment, Part Three, he brings you an interview with the CEO of ZenBox, Cailen Sullivan, and Locali Co-Founder, Melissa Rosen. Rob Mitchell: Today is June 21st, 2014, and I’m here at Locali– Melissa Rosen: Mmhm. Rob: –which, I see you guys seem to have an elevator pitch of, like, 7-11 meets Whole Foods. Melissa: Yeah. Rob: And, I actually discovered you guys, even though I live here in Venice less than a mile away, because I saw something about a Bitcoin ATM coming here. So, I just walked in and saw Cailen sitting next to the ATM and I figured you’re probably– I thought you were just interested in Bitcoin or something, but– So, I was curious, how did you guys hook up to make this happen? Melissa: Long story. Essentially, what happened was, like you said, the tagline 7-11 meets Whole Foods. And, at our store in Hollywood and here, my partner Greg Horos in the business wanted to get ATMs because, you know, to stay with that convenience theme and I said, “Ah, if we’re going to get ATMs, we really want to do something innovative. I don’t want to have an ATM just to have an ATM and everybody’s really moving away from cash”. So, I thought, “Is there a Bitcoin ATM out there”? And it was just around the time when Robocoin had launched and it was the weirdest thing. It was like the day before there had been a big press release that they sent out. So, I contacted them and they were really great and they said, “You know, we like that you guys are doing something disruptive, as well. We think that your retail model is pretty cool”. And then they ultimately connected us to Zenbox, Cailen, and that’s where it started. Rob: Ok, and I realize I didn’t introduce you, Melissa Rosen, the co-owner. And I was curious, is the other owner a husband or something, or just another—? Melissa: An ex-husband. Rob: Ok. Melissa: But a good friend, a good business partner. Rob: That’s good. You guys obviously have stayed friends. And, Cailen Sullivan— Cailen Sullivan: An ex-husband, too. No, just kidding. Melissa: I’ve got about five in LA. Rob: So, when did you first get involved in Melissa’s interest? Cailen: Well, we originally, we purchased a couple machines, two, from Robocoin and we were looking for spots to put them and we got in contact and partnered with a guy named Scott, who had met with Melissa and Greg previously and said, “Hey, there’s two stores that are looking for these two machines”. And we’re like, “Great, we have two machines”. So, we met up and put one in Hollywood, the Hollywood location and here, and here we are. Rob: So, were you specifically trying to get in Southern California with the machines? Cailen: Yeah, we were looking around the Los Angeles area and Scott kind of informed us of these two locations and I came by, checked this location out and checked hollywood out, and their whole theme is like being disruptive to their industry. For example, what you guys— like a marriage between like a 7-11, Whole Foods type thing. Melissa: Yeah, and our labor model– I think everything that we’re doing is, especially if you go to the hollywood store, I mean, this is a new baby, but the downtown store and the Hollywood store, especially, now that Hollywood is in its sixth year of business and downtown is going into year two, we’re really trying to challenge the typical fast food experience and that’s with the quality of the ingredients that we use, the labor model that we have, the customer service experience. I think that Cailen did a little mystery shopping on us and ended up liking it, so— Cailen: Yeah, the one thing that, especially with Robocoin, when you do the sign-up process, you have to actually create an account, and what you noticed a second ago, there’s about a five to ten minute period where you have to wait for your information to be verified and it’s perfect that there’s a deli in here, so you can go get amazing food. And I’ve had everything on the menu. Everything is killer. There’s something– You can get a coffee. You can get a sandwich. You can get the Badass Breakfast Sandwich, which you should try. It’s really good, Melissa: We’re fattening him up here. Cailen: Yes, this has become my third home. Rob: So, what’s become your favorite? Cailen: Well, for breakfast, the Badass Breakfast Sandwich, for sure. Rob: OK, I heard someone else mention that. Cailen: For lunch, it depends whether I’m getting a hot or a cold sandwich. Probably, hot would be— I like the Franklin a lot, very tasty. And then, for the cold one, Peaceful Warrior. It’s kind of sweet. It’s really good. Rob: OK. and people could look that up on your website? Melissa: Yeah, localiyours.com. We just had it actually redone by Tribal. They just redid our website and it’s really beautiful. Cailen: It looks really nice. Melissa: It’s a local company. Rob: Locali is with I, not a Y. Melissa: Yes, with an I, L-O-C-A-L-I-Y-O-U-R-S dot com. Rob: OK, so, my big question when I first saw this, I thought, “OK, it’s a Robocoin,” but then I saw, “wait, it says Zenbox,” and then I heard expresscoin. I actually saw a press release and I read the relationship and still didn’t understand it. Cailen: Yeah, that was a confusion on the company part. So, we’re in partnership. This requires a lot of explanation. Rob: Make sure you define the “we”. Cailen: OK, so, Zenbox was a brand that my company at the time, called California CryptoCoin started and we were solely using these two machines to get going. We then partnered with a company called 21st Century, which I’m now a part of and running, as well, which runs kind of a bigger network of these machines. Rob: Bitcoin ATMs? Cailen: Bitcoin ATMs, yes. Now, 21st Century is a subsidiary of expresscoin and expresscoin, you can check them out on expresscoin.com. They actually handle our back end of the exchange. They provide an exchange service for cash online and what these are is kind of an extension of what they do, just providing a tangible outlet for them. So, expresscoin now owns 21st Century. 21st Century is kind of the parent company and the LLC of these machines and Zenbox is the brand. It’s confusing, but in the future what you’re going to see is just the tangible Zenbox brand and that’s what you’ll recognize. Now, there’s also — it’s not on here yet — but there’s stickers that will say, “part of the expresscoin network”. What that means is expresscoin is powering the back end of all these machines that we’re going to have up. So, that’s kind of where our marriage happens. Rob: How do price, I guess, Bitcoin and the fees involved? Cailen: OK, so, you want to know the actual price of what’s actually been priced, or the fees, specifically, or both? Rob: Both. Where do you get the price from and— Cailen: So, the price is pulled from expresscoin.com. You can actually go onto their website and check out the price on there. They have a ticker up at the top. Like I said, they’re an exchange or a gateway, so to speak, so, you can purchase from them directly. The percentage that we charge is 5%, which is a little bit above what, normally, an exchange would charge, which is roughly anywhere between 1 and 3%. But, the reason for doing so is we provide a convenience, right? I mean, as opposed to waiting three to five days for the ACH network to clear your money into your bank account, it’s pretty much instantaneous and you get cash in hand, day of. So, that’s kind of what we’re providing as a convenience for a little bit extra of a fee. Rob: And how close is that, the expresscoin rate, typically to the, I guess, major Coinbase and Bitstamp and stuff like that? Cailen: Well, Coinbase is roughly the same thing as expresscoin. expresscoin focuses on taking cash, check and wire transfers. Coinbase offers the same service, so to speak, except they go through the ACH system or the banking system, which takes time, but they’re built on top of the same platform, so to speak. I believe Coinbase actually fills their market orders with Bitstamp and expresscoin does the exact same. So, they’re in the same boat (inaudible). Rob: Oh, Ok, so, I didn’t even understand that. So, expresscoin isn’t an exchange in itself. It uses Bitstamp? Cailen: Yeah, so, there’s really only two real exchanges on this planet that actually fill market orders. The rest are kind of gateways or platforms for people to actually get their money into it or use it, so to speak. Rob: So, back to this machine, the Zenbox. Is there a maximum amount of US dollars it will spit out? Cailen: It holds 2,200 bills, so, you can literally put all hundreds in there if you wanted to. And there’s two cassette dispensers, so, it holds 2,200 bills each and you can set the exact denomination that you want to. Rob: So, one transaction, though? Is there a transaction max? Cailen: Yeah, well, for FinCEN regulations, you have to keep it under 10,000 bucks otherwise you, the user, would have to report it to FinCEN. So, we keep it under that. There is a machine, and it’s not Zenbox branded, but it’s under the 21st Century brand– company in the D Hotel that just launched and they do, I mean, people are doing 7,000 transactions, like, two or three times a day. So, I mean, they’re pumping out a lot and the reason being is there’s actually a lot of people selling there to get their cash out, like, mining operations, people who just have a large amount of Bitcoin in Las Vegas that want to get cash in hand that day. Rob: So, could I do two $9,000 transactions and not be reported to FinCEN? Cailen: It’s 10,000 a day. Rob: 10,000 a day, Ok. So, every day, I could do— Cailen: You could do 9,999 a day. Rob: But, I guess, now, some compliance person somewhere might say that’s suspicious, I guess— Cailen: Yeah, and things– I mean, for example, expresscoin on the back end is verifying those transactions and will check that and for fraud purposes check exactly what’s going on and probably contact you and get some more information from you. Rob: So, they are the ones who have to make sure the compliance is right? Cailen: Yeah, and they’re the parent company why we’re owned and associated with them, that actually holds the licenses for us to operate. So, they’re compliance. They’re on top of all the compliance issues. Rob: Do you know do they directly hold those or are they able to kind of piggy-back on an existing financial— Cailen: No, they actually directly hold them. Expresscoin, LLC is the one who has those licenses. Rob: Ok. Cailen: Specifically for California, there hasn’t been an exact guidance or issuance of any type of license that we have to hold, but both expresscoin and I, personally, have been pretty preemptive on getting that license before anyone else does. We’ve gotten verbal agreement that says, you know, you can operate since there is no clear guidance, but as a whole, they have their MSB, which is Money Service Business, they registered with FinCEN. So, everything that they make, every– all the volume that goes through is reported. Very on top of compliance. Rob: Ok, so, as far as buying Bitcoin, is it the same way, $10,000 limit or—? Cailen: Yes. Really, it’s a $10,000 limit either or, either way, and that’s just a FinCEN thing. There’s nothing to do– I mean, you could do a million if you wanted to, but you’d have to report it, so— Rob: So, is the only way to buy Bitcoin with one of these machines with paper US dollars? Cailen: Paper US dollars, yes. I mean, there’s thoughts in the future for actually accepting cards, but that also incurs fees on the back end for us having to pay those Visa and Mastercard kind of networks. Rob: So, strictly a cash and Bitcoin— Cailen: Strictly cash and Bitcoin, yes. Rob: Interesting. Cailen: Yeah. Melissa: Very interesting. Rob: And, is there any minimum amount? Can you buy a dollar’s worth? Cailen: You can buy– I bought a dollar’s worth this morning. Rob: Wow. Cailen: Yeah. Rob: So, what I talked to you briefly about, which seemed kind of neat is, if you wanted to, hopefully, save offline, like paper wallet, you could spend a dollar—- Cailen: Yeah, at the machine itself Robocoin software is pretty cool. It allows you to generate a wallet on the spot and it prints out, as you see here, a paper wallet on a receipt with your private key. Now, if you lose that, you lose your private key and you potentially lose the money that’s on here. However, any wallet service you can actually import this private key to import your wallet into any digital wallet you may have on your computer or tablet. Melissa: Oh, that’s great. Rob: So, my personal feeling would be: I would love this more if it had a public and a private key QR code. Cailen: Ok. That’s something to know for sure. And I believe they originally did. I don’t know exactly why they did away with it. That’s something you want to ask Robocoin or I can do it for you. Rob: Are you committed to only working with Robocoin on your—? Cailen: No, we are completely agnostic as to the machines we put out. Robocoin just happens to have, like, the most compliance features with it. For example, you know, the palm and hand scanner and the ID scanner. It’s kind of more robust from a know-your-customer standpoint and, which is KYC and KYC is really important when you’re doing any financial transaction. Government’s huge on that. They want as much data as possible so if, in fact, they want to do a security audit or they want to do some type of transactional audit, they’re like, “Hey, give me all the information you have,” and you have it. So, if someone’s committing fraud, you know exactly who’s doing it. Rob: Let me ask— get back to Melissa a little bit. Melissa: Just so fascinating—- Rob: You’re interested as much as I am. Melissa: Yeah. I really am. Rob: So, I saw you spoke, just a couple days ago, at SoCo Beach— Melissa: Oh, yeah, I did. It was fun. Rob: So, what was your panel about? Melissa: Mobile payment solutions. So, we’re talking about the solutions that we use here at the store, you know, our opinions, as a merchant, about that, where we think that landscape is going. It’s all wild west and it’s really exciting. We’ve just switched to cloud-based point of sale system this year, in January, and we’ve also partnered with a lot of third parties like Eat24 and GrubHub. And it a really great panel. It was very good debate and informative discussion. I enjoyed that. Rob: So, was the Bitcoin ATM much of the discussion? Melissa: I, of course, I brought it up, and that our food is out of this world. But, yeah, it wasn’t a huge part of the discussion, but just in relation to, you know, cashless living and how, you know, things are changing and what percentage of people are moving towards that. And there was a lot of discussion of Uber being such a seductive experience that I even noted during the presentation just some of my staff that only goes to check cashing stations and never really has had a bank accounts are now getting credit cards and bank accounts because they want to use Uber, which is interesting— Rob: Oh, wow. Melissa: –gateway and they’re online shopping and, so, it’s interesting to see the influence of that. Rob: So, you could see Bitcoin helping people in that situation, I’m sure. Melissa: Oh, yeah. I think, you know, a seamless transaction experience is so crucial. That was one of the difficult things for us switching to the new point of sale system because, while we have a kitchen monitor that’s great, that’s really easy to use now, in terms of transmitting the orders from the point of sale to our deli, there were some bumps and bruises along the way with launching that new system and it’s just terrible any time someone has to wait more than 30 seconds, you see them, you know, break a sweat. We’re so used to that instantaneous, you know, experience. I think it’s exciting what can happen. Cailen: You know, another thing that people don’t necessarily realize, and it’s not necessarily directed towards most food areas, but merchants have to deal with, if they’re using any POS system like and they’re using a network like Visa and Mastercard, they have to deal with chargebacks and fraud, which, depending upon your volume, can be a huge number of your business, like 3 to 5%, which may not seem like that much, but when you’re dealing with a large volume, is gigantic. With Bitcoin, you don’t have that. For example, let’s say I bought something and said– or I purchased something online and the food never came to my house. I then dispute with Melissa and say, “Hey, my food never came”. And then they– They dispute it with their credit card company. Let’s say I used Visa; Visa, then, pays the money back to the customer and now wants us to pay 3 to 5% to cover that. So, she just lost 3 to 5% and the food that never got delivered. Melissa: Yeah. Cailen: That’s something that Bitcoin actually solves so there’s no chargebacks. Once it’s sent, you have the money. That’s it. And if– It’s almost like cash in a sense. So, it would be like handing the cash. So, the dispute would actually happen between me and Melissa and she’d send the Bitcoin directly back to me. It kind of– It cuts back on loss. Rob: Sure. And I know some businesses have higher rates than that, too. How is it for you? Do you have any idea what your chargeback rate is? Melissa: You know, it’s very rare for us just because of our customer service is, you know, so attentive. But, yeah, with other, you know, larger entities— Cailen: And it’s like on the spot, right? Melissa: Yeah, and I mean we do have people say I didn’t get this right or– and then we have to deal with deliveries fees and all that stuff, so, it does– I mean, I think the one thing that Greg, my partner, had said in this discussion on last Thursday was frustration that we feel with some of these other providers that are getting bulk rates from the processors, but not passing that on. So, for example, most of them, we have to give them 10% plus the 3%, almost, on the credit card. Cailen: So, using something like this, where you’re saving that percentage, I mean, that’s something that would trickle down to the customer. That’s what a lot of people are doing. “Hey, use Bitcoin, you get 15% off”, whatever. Melissa: Yeah, and so, we’re actually looking into ways to integrate this so that we can have a more direct experience in terms of even having people possibly have like a wallet that we would have. We’re going to be working with a developer to (inaudible) create a wallet for us that people could, let’s say, buy $100 worth of Locali food and we give you $110 and then you’re just pulling out of— Rob: And this is based on Bitcoin or no? Melissa: Well, we want it to be based on cash and Bitcoin that you would be able to use either one. So, we’re going to be working on that because it’s something that we’ve been talking about. And then that way, our customers that are loyal to us, they would just keep filling– I mean, most of our customers in Hollywood, three to four times a day, come in. That’s the kind of regulars that we have. So— Rob: How long has that store been there? Melissa: Sixth year. We’re in the sixth year of business. Rob: Wow. And how long has this place been here? Melissa: Two months now. Rob: Oh, Ok, no wonder I hadn’t heard of you. Melissa: Oh yeah, yes, a baby. Rob: Ok. What is the arrangement between you guys to have this machine here? Melissa: So, we’re the landlord technically. We’re the landlord so we’re getting a percentage related to that. Cailen: We pay a percentage to actually rent this space right here. Rob: Alright, so, you guys are obviously partners in this endeavor, even though each of you really could not be. Anyone could have this ATM, I guess, in their store and not really care one way or the other if they wanted to rent the space. Cailen: I mean, this is so new so there’s not really a structure set up for it, but any general ATM that you’re going to put into a store, there’s like a percentage fee that you’re going to pay the tenant. That’s just how it is. I mean, you’re not going to pay a flat fee. For example, you don’t know exactly how much foot traffic is going to come in and use it or whatnot. So, it’s normally percentage based for any type these type of machines or ATM-like machines.