Written by: Michael Roddan, Yueqi Yang
Compiled by: Block Unicorn
Original Title: Stablecoin Startups Bring Trouble to JPMorgan
JPMorgan has recently frozen accounts used by at least two fast-growing stablecoin startups in recent months, highlighting the risks that cryptocurrency transactions pose 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 the stablecoin startups once claimed that customers did not need identity verification before transactions. Another startup, after JPMorgan froze its account, suddenly terminated all customers from high-risk countries, according to the company's communication records with customers.
Stablecoins have surged in popularity overseas, especially in countries with unstable economies and currencies. Last summer, the U.S. passed a stablecoin bill, giving this type of cryptocurrency pegged to the U.S. dollar legal status.
Individuals and businesses use stablecoins to obtain U.S. dollars and make overseas remittances. They need to establish connections with U.S. banks to convert cryptocurrencies into U.S. dollars. However, banks are cautious, fearing penalties from regulators even during the Trump administration, which supported cryptocurrencies. Global and U.S. regulators and law enforcement agencies have stated that stablecoins have been used to fund terrorist organizations, launder money, and engage in other criminal activities.
JPMorgan froze the accounts of two startups invested in by venture capital firm Y Combinator—Blindpay and Kontigo—both primarily focused on the Latin American market. These two companies connected with JPMorgan through the digital payment company Checkbook, which is also supported by JPMorgan and other institutions.
Blindpay has processed over $100 million in transactions. In August of this year, the company began offering an account through JPMorgan aimed at helping customers overcome barriers to entering the U.S. financial system. Blindpay stated in a blog post at the time that obtaining loans from U.S. banks was 'much harder than imagined.'
Later that day, JPMorgan and Checkbook froze Blindpay's account. According to a series of now-deleted blog posts on the company's website, the stablecoin company quickly began strengthening anti-money laundering measures and customer verification. Blindpay did not respond to requests for comment.
Last year, Checkbook joined JPMorgan's payment partner network, enabling Checkbook to process payments for its customers through JPMorgan. For this purpose, Checkbook creates virtual accounts for its customers at JPMorgan.
Virtual accounts allow fintech companies like Checkbook to quickly open U.S. dollar-denominated accounts for overseas customers and business clients, avoiding situations where they cannot 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 U.S. address.
Virtual accounts have become a popular service offered by stablecoin companies like Blindpay. Checkbook's accounts have opened a backdoor for these small stablecoin companies to enter the U.S. financial system. Soon after, JPMorgan noticed a sharp increase in the number of disputed transactions (i.e., refunds and chargebacks). Chargebacks can arise from fraud, unauthorized use, and billing errors, especially when cardholders report identity theft or dispute purchases. It is unclear why these companies experienced a surge in disputed transactions. JPMorgan has contacted Checkbook for an explanation.
Checkbook CEO PJ Gupta stated that companies like Blindpay and Kontigo were among the reasons for the rise in chargeback rates. Gupta pointed out that these companies need to ensure that transactions processed through their systems are legitimate and valid and verify the identities of remitting customers. Gupta also mentioned that while Checkbook conducts customer due diligence on the stablecoin companies themselves, due diligence on the customers is the responsibility of these companies.
Gupta stated that when disputed transactions exceed a certain threshold, Checkbook and JPMorgan freeze customer accounts. 'In such cases, we suspend operations and conduct an analysis until we obtain assurances. We send the assurances to the bank, and if both the bank and we agree that the issue will not recur, we can reopen the account. If we cannot reach an agreement, we will not reopen the account,' Gupta said.
Gupta mentioned that transactions from stablecoin companies account for only a small portion of Checkbook's total transaction volume, which exceeds $1 billion per month. He stated that the disputed transactions that prompted JPMorgan's action were due to a large influx of customers using the services provided by stablecoin companies. 'It was entirely because they opened the floodgates, and a large number of people rushed in through the internet,' Gupta said, referring to the disputed transactions of these startups.
Venezuela Sanctions
JPMorgan stated that freezing the accounts of these stablecoin companies was not due to the nature of their business. 'This has nothing to do with stablecoin companies,' a JPMorgan spokesperson said. 'We provide banking services to stablecoin issuers and related businesses, and we recently facilitated the listing of a stablecoin issuer.' Beyond this, the bank declined to comment further.
Kontigo, which 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 customers, and its founders claim the company has processed over $1 billion in transactions. Over the past two decades, the U.S. has imposed sanctions on certain sectors of Venezuela's economy, the government, and individuals, and President Donald Trump has been increasing pressure on Venezuela's ruling authorities.
In a promotional video released by Kontigo this month, the company claimed: '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 limits.' Kontigo co-founder Jesus Castillo stated that customers do not need to submit identity verification for cryptocurrency transactions, but identity verification is required for transactions involving fiat currency.
According to Kontigo's communication records with customers, JPMorgan suddenly froze the company's account in November. Checkbook CEO Gupta stated that the account freeze was due to a significant increase in the number of disputed transactions. Castillo, however, said that his startup and other similar companies are facing issues caused by Checkbook.
The role Kontigo plays in transferring funds out of Venezuela was highlighted in a recent report by Transparencia Venezuela, the Venezuelan chapter of Transparency International. The report stated that users could deposit up to $100,000 into Kontigo's digital wallet through private banks in Venezuela without any identity checks on the depositor. Castillo called these claims false and stated that the company has filed a lawsuit against the nonprofit. Transparencia Venezuela did not comment.
He mentioned that Kontigo also uses Bridge, owned by Stripe, to provide virtual accounts for some of its users in the U.S. and Europe. Castillo did not respond to questions about Kontigo's compliance controls. Bridge declined to comment.
After JPMorgan froze Blindpay's account, the stablecoin company's CEO and co-founder Simon Moura and co-founder João Borges flew to San Francisco to meet with an investor from Y Combinator and search for a new payment processor or bank willing to work with them.
'Unfortunately, we were rejected by this promising payment processor because they are still reluctant to work with stablecoin companies,' Moura wrote in a now-deleted blog post. Moura also visited JPMorgan's office to explain how Blindpay operates.
Due to issues with due diligence, Blindpay's potential customer base appears to have significantly shrunk. First, the company stated in a later-deleted blog post that customers from 'high-risk countries' would need to 'undergo stricter KYC processes,' referring to the 'Know Your Customer' regulatory system applicable to banks. A few days later, Blindpay announced that, after a round of due diligence, all its virtual accounts and related crypto wallets had been closed.
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