JPMorgan Closes "Financial Backdoor": Stablecoin Cross-Border Payments Face Compliance Reshuffle

Written by: Michael Roddan, Yueqi Yang

Translated by: Block unicorn

Original title: Stablecoin Startup Causes Trouble for JPMorgan Chase

JPMorgan Chase has recently frozen accounts used by at least two rapidly growing stablecoin startups, highlighting the risks that cryptocurrencies pose to banks, which must understand their clients 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 startups claimed that clients did not need to undergo identity verification before trading. Another startup, after JPMorgan froze its account, abruptly terminated all clients from high-risk countries based on communication records with the company.

Stablecoins have surged in popularity overseas, especially in countries with unstable economies and currencies. Last summer, the U.S. passed a stablecoin bill that legitimized this dollar-pegged cryptocurrency.

Individuals and businesses use stablecoins to access U.S. dollars and make overseas remittances. They need to establish relationships with U.S. banks to convert cryptocurrencies into dollars. However, banks remain cautious, worried that even during President Trump’s pro-cryptocurrency administration, they could face regulatory penalties. 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 Chase has frozen accounts of two startups funded by venture capital firm Y Combinator—Blindpay and Kontigo—both primarily focused on the Latin American market. These companies connected with JPMorgan through digital payments company Checkbook, which also received support from JPMorgan and other institutions.

Blindpay processed over $100 million in transactions. In August, the company began offering an account at JPMorgan Chase to help clients overcome barriers to entering the U.S. financial system. Blindpay stated in a blog post at the time that obtaining a U.S. bank loan was “much more difficult than expected.”

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 firm 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 it to process payments for its clients through JPMorgan Bank. To do this, Checkbook created virtual accounts at JPMorgan for its clients.

Virtual accounts allow fintech companies like Checkbook to quickly open dollar-denominated accounts for overseas and corporate clients, avoiding their inability to access the U.S. banking system for various reasons. Under U.S. law, companies opening bank accounts in the U.S. must provide proof of their business operations in the U.S. and a physical operational address.

Virtual accounts have become a popular service offered by stablecoin companies like Blindpay. Checkbook’s accounts have opened a backdoor into the U.S. financial system for these small stablecoin firms. Soon after, JPMorgan discovered a sharp increase in disputed transactions (refunds and chargebacks). Chargebacks may stem from fraud, unauthorized use, or billing errors, especially when cardholders complain of identity theft or dispute purchased goods. It is unclear why these companies experienced a surge in disputed transactions. JPMorgan has contacted Checkbook for an explanation.

Checkbook CEO PJ Gupta said that companies like Blindpay and Kontigo are among the reasons for the rising chargeback rate. Gupta pointed out that these companies need to ensure that transactions processed through their systems are legitimate and verify the identities of remittance clients. He also said that while Checkbook conducts due diligence on stablecoin companies themselves, due diligence on their clients is the responsibility of these companies.

Gupta stated that when disputed transactions exceed a certain threshold, Checkbook and JPMorgan freeze the client’s accounts. “In such cases, we suspend operations and analyze until we get assurances. We send the assurances to the bank, and if both the bank and we believe the issue won’t recur, we can reopen the account. If we cannot reach an agreement, we do not reopen the account,” Gupta said.

Gupta noted that the transaction volume of stablecoin companies accounts for only a small part of Checkbook’s total transactions, which exceed $1 billion per month. He explained that the disputed transactions prompting JPMorgan’s action were caused by a large influx of customers using services provided by stablecoin startups. “It’s entirely because they opened the gates, and a large number of people flooded in via the internet,” Gupta said when discussing these startups’ disputed transactions.

Venezuela Sanctions

JPMorgan stated that freezing these stablecoin companies’ accounts was not related to their business nature. “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 a stablecoin issuer’s listing.” The bank declined to comment further.

Kontigo, which raised $20 million from multiple venture capital firms including Y Combinator and Founders Inc., is one of the two licensed cryptocurrency platforms operating in Venezuela. Its founder said the company has processed over $1 billion in transactions. Over the past twenty years, the U.S. has imposed sanctions on certain sectors, government, and individuals in Venezuela, with Donald Trump’s administration increasing pressure on the Venezuelan authorities.

In a promotional video released this month, Kontigo 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 transfer funds instantly and without limits worldwide.” Kontigo co-founder Jesus Castillo said clients do not need to submit identity verification for cryptocurrency transactions, but if the transaction involves fiat currency, verification is required.

Communication records with clients show that JPMorgan suddenly froze Kontigo’s account in November. Checkbook CEO Gupta said the freeze was due to a significant increase in disputed transactions. Castillo said his startup and other similar companies are facing issues caused by Checkbook.

Kontigo’s role in transferring funds out of Venezuela was highlighted in a recent report by Transparency International’s Venezuela chapter, Transparencia Venezuela. The report states that users can deposit up to $100,000 into Kontigo’s digital wallet via private banks in Venezuela without any identity verification of the depositor. Castillo said these claims are false and that the company has filed a lawsuit against the nonprofit organization. Transparency International Venezuela did not comment.

He added that Kontigo also uses Stripe’s Bridge to provide virtual accounts to some 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 startup’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 seek new payment processors or banks willing to work with them.

“Unfortunately, we were rejected by this promising payment processor because they are still unwilling to work with stablecoin companies,” Moura wrote in a now-deleted blog post. Moura also visited JPMorgan’s office to introduce them to Blindpay’s operations.

Due to due diligence issues, Blindpay’s potential customer base appears to have shrunk significantly. Initially, the company stated in a later-deleted blog post that clients from “high-risk countries” would need to “undergo stricter KYC procedures,” referring to the “Know Your Customer” regulations applicable to banks. A few days later, Blindpay announced that after a due diligence review, all its virtual accounts and related crypto wallets had been closed.