Written by: Michael Roddan, Yueqi Yang
Compiled by: Block unicorn
Original title: Stablecoin startup brings trouble to JPMorgan Chase
JPMorgan Chase has frozen accounts used by at least two rapidly growing stablecoin startups in recent months, highlighting the risks that cryptocurrency trading poses to banks, which must understand the customers they do business with and the sources of their funds.
These stablecoin startups operate in Venezuela and other regions where sanctions or other restrictions pose legal risks to banks. One of these startups claimed that customers did not need to verify their identity before trading. Another startup abruptly terminated all customer accounts from high-risk countries after JPMorgan Chase froze its accounts, according to the company's communications with customers.
Stablecoins have seen a surge in popularity overseas, especially in countries with unstable economies and currencies. Last summer, the United States passed a stablecoin bill, granting legal status to this type of cryptocurrency pegged to the US dollar.
Individuals and businesses use stablecoins to obtain US dollars and make overseas remittances. They need to establish connections with US banks to convert cryptocurrencies into dollars. However, banks are cautious, fearing regulatory penalties even during President Trump's support for cryptocurrencies. Global and US regulators and law enforcement agencies have stated that stablecoins have been used to finance terrorist organizations, launder money, and engage in other criminal activities.
JPMorgan Chase has frozen the accounts of two startups backed by venture capital firm Y Combinator—Blindpay and Kontigo—which primarily focus on the Latin American market. The two companies had connections with JPMorgan Chase through digital payments company Checkbook, which is also backed by JPMorgan Chase and other institutions.
Blindpay has processed over $100 million in transactions. In August, the company began offering an account with JPMorgan Chase, designed to help customers overcome barriers to accessing the U.S. financial system. In a blog post at the time, Blindpay stated that obtaining loans from U.S. banks was "far more difficult than imagined."
Later that day, JPMorgan Chase and Checkbook froze Blindpay's accounts. According to a series of now-deleted blog posts on the company's website, the stablecoin company quickly began strengthening its anti-money laundering measures and customer verification. Blindpay did not respond to requests for comment.
Last year, Checkbook joined JPMorgan Chase's network of payment partners, enabling Checkbook to process payments for its customers through JPMorgan Chase. To do this, Checkbook creates virtual accounts for its customers at JPMorgan Chase.
Virtual accounts allow fintech companies like Checkbook to quickly open dollar-denominated accounts for overseas and corporate clients, thus avoiding situations where they are unable to access the U.S. banking system for various reasons. Under U.S. law, businesses opening bank accounts in the U.S. must provide proof of their operations in the U.S. and a physical address in the U.S.
Virtual accounts have become a popular service offered by stablecoin companies like Blindpay. Checkbook's account opened a backdoor for these smaller stablecoin companies into the U.S. financial system. Soon after, JPMorgan Chase noticed a sharp increase in disputed transactions (i.e., refunds and chargebacks). Chargebacks can stem from fraud, unauthorized use, and billing errors, especially when cardholders complain of identity theft or dispute purchases. The reason for this surge in disputed transactions is unclear. JPMorgan Chase has contacted Checkbook for an explanation.
Checkbook CEO PJ Gupta stated that companies like Blindpay and Kontigo are among the reasons for the rising chargeback rate. Gupta pointed out that these companies need to ensure the legitimacy and validity of transactions processed through their systems and verify the identities of remittance customers. Gupta also stated that while Checkbook conducts customer due diligence on stablecoin companies themselves, due diligence on their customers is the responsibility of those companies.
Gupta stated that Checkbook and JPMorgan Chase freeze customer accounts when disputed transactions exceed a certain threshold. "In this case, we suspend operations and conduct analysis until we receive assurance. We send the assurance to the bank, and if both the bank and we believe the problem will not recur, we can reopen the account. If we cannot reach an agreement, we will not reopen the account," Gupta said.
Gupta stated that stablecoin companies account for only a small fraction of Checkbook's total trading volume, which exceeds $1 billion per month. He indicated that the controversial transactions that prompted JPMorgan Chase's action were due to a surge of customers using services offered by stablecoin companies. "It's entirely because they opened the floodgates, a huge influx of people through the internet," Gupta said, referring to the controversial transactions involving these startups.
Venezuelan sanctions
JPMorgan Chase stated that freezing the stablecoin companies' accounts was not related to the nature of their business. "This has nothing to do with stablecoin companies," a JPMorgan Chase spokesperson said. "We provide banking services to stablecoin issuers and related businesses, and we recently facilitated the IPO of a stablecoin issuer." The bank declined to comment further.
Kontigo, which has raised $20 million from several venture capital firms including Y Combinator and Founders Inc., is one of two cryptocurrency platforms authorized by Venezuelan regulators to operate in the country. Kontigo focuses on serving Venezuelan clients, and its founders say the company has processed over $1 billion in transactions. The United States has imposed sanctions on certain sectors of the Venezuelan economy, government, and individuals for the past two decades, and President Donald Trump has been increasing pressure on the ruling authorities in Venezuela.
In a promotional video released this month, Kontigo claims, "In just 30 seconds, individuals and businesses worldwide can transact using USDC and USDT stablecoins without KYC (Know Your Customer). Users can link bank accounts and instantly transfer funds globally without restrictions." Kontigo co-founder Jesus Castillo stated that customers do not need to submit identity verification for cryptocurrency transactions, but verification is required if the transaction involves fiat currency.
According to Kontigo's communications with its clients, JPMorgan Chase abruptly froze the company's accounts in November. Checkbook CEO Gupta stated that the account freezes were due to a significant increase in disputed transactions. Castillo indicated that his startup, along with other similar companies, is facing similar issues stemming from Checkbook.
Kontigo's role in transferring funds out of Venezuela was highlighted in a recent report by Transparency International's Venezuelan branch, Transparencia Venezuela. The report claimed that users could deposit up to $100,000 into Kontigo digital wallets through Venezuelan private banks without any verification of the depositor. Castillo stated that these claims were false and has filed a lawsuit against the non-profit organization. Transparency International's Venezuelan branch declined to comment.
He stated that Kontigo also uses Stripe's Bridge to provide virtual accounts for some of its users in the US and Europe. Castillo did not respond to questions regarding Kontigo's compliance controls. Bridge declined to comment.
After JPMorgan Chase froze Blindpay's accounts, the stablecoin company's CEO and co-founder Simon Moura and co-founder João Borges flew to San Francisco to meet with an investor in Y Combinator and look for new payment processors or banks willing to work with them.
"Unfortunately, we were rejected by this promising payment processor because they remained unwilling to work with stablecoin companies," Moura wrote in a now-deleted blog post. Moura had also visited JPMorgan Chase's offices to explain how Blindpay works.
Blindpay's potential customer base appears to have shrunk significantly due to issues with its due diligence practices. First, in a later-deleted blog post, the company stated that customers from "high-risk countries" would need to undergo "more stringent KYC processes," referring to the "Know Your Customer" (KYC) regulations applicable to banks. A few days later, Blindpay announced that all its virtual accounts and associated crypto wallets had been closed following a round of due diligence.
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