The crypto wallet Strike lacks a license to operate in most states in the United States, which means that many cryptocurrencies that use Strike to transfer funds to El Salvador may be illegal.
Original title: “El Salvador’s Inclusion of Bitcoin into Fiat Currency: Compliance Issues in Strike Payments”
Written by: Scott Chipolina
Translation: Fenbushi Capital
The President of El Salvador, Nayib Bukele, announced this month that El Salvador will become the first country in the world to accept Bitcoin as a legal tender. This move caused an uproar. In order to realize bitcoin payments, El Salvador will cooperate with companies such as Chicago-based Zap Solutions Inc.. At present, the people of El Salvador have started using the company’s digital wallet Strike in a coastal town (the crypto community calls it “Bitcoin Beach”). Although Strike has the technology to help El Salvador embrace Bitcoin, the key is that it does not have a money transmitter license.
An investigation by Decrypt found that Zap lacked operating licenses in most states in the United States . Experts believe that this means that many cryptocurrencies that use Strike to transfer money to El Salvador may be illegal, and this situation may further affect the controversial Bitcoin plan in this Central American country. Strike CEO Jack Mallers and others at the company declined to comment.
New scenarios for Bitcoin applications
First introduce the CEO Jack Mallers of Strike. Mallers’ father was the founder of a well-known Chicago brokerage company, and his mother claimed to be the “Mother of Bitcoin.” He is a man in his 20s who likes to wear a hoodie. The photo of his homepage on Twitter is the laser eye of Bitcoin believers. At a recent conference in Miami, a crypto enthusiast called the Mallers the hero who helped President Bukele bring Bitcoin to El Salvador.
Mallers introduced El Salvador’s President Bukele to the audience in Miami, and recommended the Strike payment platform (similar to Venmo) to the President, making it an indispensable part of El Salvador’s embrace of Bitcoin. The company has always been proud of its digital wallet technology, which allows users to quickly convert cryptocurrencies and fiat currencies, helping Salvadoran merchants to accept Bitcoin as payment while complying with Bukele’s laws.
Mallers said in an interview with CNBC earlier this month: “My focus is to embrace the characteristics of Bitcoin and make it the most powerful currency network on the planet.” The company behind Strike, Zap Solutions, was established in 2019. Currently Zap The company has raised more than $18 million in funding for its main products, and people can conduct fast transactions through the latest expansion of Bitcoin.com, the Lightning Network.
Why should I get a fund transfer license?
When talking about his recent plans, Mallers told CNBC that he was “helping El Salvador build the most inclusive financial infrastructure in human history.” So does Zap have a license? On the one hand, Zap is a popular Bitcoin startup, on the other hand, it is a company with a money transmitter license. Money transmitter is a term with special legal meaning.
From check cashing agencies to Bitcoin startups, they must be registered with FinCEN to be protected by it. FinCEN is an agency that regulates money laundering and the financing of terrorist organizations. According to the FinCEN website and the Strike product website, except for New York and Hawaii, Strike wallets can be bought anywhere in El Salvador and the United States. Although Zap is registered with FinCEN, it is only the first step in the chaos.
To do business in the U.S., the fund transmitter must obtain a license in each state within the scope of operations (Montana is an exception). However, Zap has not been able to do this. Searching NMLS (a government portal for license checking) reveals that Zap only has licenses in one state in Washington. This may be because Washington State is the dominant state in a multi-state license application process, which aims to simplify the state-to-state license application process; however, the process is slow and costly, especially for start-ups.
But the regulator told Decrypt that the Washington license was only the first step in granting licenses by other states, but records showed that no state other than Washington had granted licenses. When Decrypt told several lawyers what they had seen, everyone expressed surprise at the unlicensed operation of the fund transmitter.
Anderson Gere’s corporate lawyer Hailey Lennon believes that the transfer of funds may be possible without a national license. For example, companies can build services in a way that does not require a license, thereby exempting state laws, or they can apply for a license as a bank. However, Decrypt could not find any evidence that Strike or Zap had adopted any of the above methods.
Another common interpretation of the fund transfer license law is that a company can appoint an “authorized representative” to perform fund transfers through a third-party representative. However, Stan Koppel of Bryan Cave Leighton Paisner Law Firm told reporters that authorized representatives can only be appointed by approved entities or entities that do not require approval under state law.
Lucinda Fazio, director of the Consumer Services Department under the Ministry of Financial Institutions, also said: There can be no potential loopholes in the above-mentioned multi-state agreement. “Lucinda Fazio said: “One of the main objectives of the plan is that no company can conduct business in the state without obtaining a license from the state.”
Obviously, Strike may be opportunistic in applying for a license, which is a common practice for start-ups.
The founder of Shawn Westrick Law Firm said to Decrypt: “I know that people in the field of encryption and technology do things quickly and innovate. You know that asking for forgiveness is much easier than getting a license. But experience tells me that violating the fund transfer law is It’s a big thing.” Lucinda Fazio added that she couldn’t think of why a company that knew it could do business with a license but hesitated to apply.
If Strike does operate without a license, it may face a series of consequences. Fox also said: “I think there are various remedial measures, including fines, injunctions, etc., but no matter how they are dealt with, it means that the company needs to stop operations in the state.”
Mallers’ silence
Zap’s unlicensed operations across the United States have also brought some important regulatory implications. The first and most important thing is that having a national capital transmission license can prove that a company has an anti-money laundering plan (by setting a minimum net worth threshold), has done a back-adjustment, and finally obtained a business license. Operating without a license means that consumers cannot be sure whether a company as a fund transfer party meets any regulatory standards for operating the business.
A report published by consulting firm Sia Partners stated: “Federal regulations are mainly to ensure financial security and anti-money laundering, while state-level capital transmission licenses are designed to protect consumers and ensure that applicants are safe, reliable and free of debt.
Unlicensed operation is problematic for potential money transferers in any jurisdiction. But when we look at Zap’s frontline role in El Salvador, this situation is particularly serious considering the corruption problem left over from El Salvador’s history.
El Salvador’s Bitcoin ambitions
Obviously, without a license, users cannot be sure whether a company has fulfilled its anti-money laundering obligations. But the Salvadoran economy heavily relies on US remittances (as Mallers himself pointed out), and reliance on an apparently unlicensed application (such as Strike) may complicate the legalization of Bitcoin.
The country has been under scrutiny for financial malfeasance. According to the 2020 Corruption Perception Index, El Salvador has a score of 36/100. In terms of handling corruption, El Salvador ranks lower than Brazil and Colombia, and only two places higher than Panama. At the same time, El Salvador has also produced an evil gang known as MS-13 or “Mara Salvatucha”, which aroused the anger of former President Trump and American lawmakers.
Just in May of this year, the US Congress announced the corrupt list of current and former politicians in El Salvador (as well as Honduras and Guatemala). Among the 16 people named, 5 of Bukele’s assistants were accused of corruption.
“We can’t expect the people of El Salvador, Guatemala and Honduras to live and work in peace, because the elected officials have no intention of serving the public because they earn money,” Congressman Rep. Norma J. Torres said.
In view of El Salvador’s recent decision to introduce an anti-corruption agreement, the country’s lawmakers will only conduct stricter scrutiny of Bukele’s arrangements with regard to Strike. Those who support Bukele’s decision to adopt cryptocurrency as legal tender believe that cryptocurrency will change the rules of the game and be a watershed in the pursuit of financial inclusion and transparency. But skeptics, including the executive director of the Coin Center, which publicly supports cryptocurrencies, worry that Bukele will enforce the law in a mandatory manner.
Of course, Mallers refused to provide details about Strike’s legal compliance, failing to increase people’s confidence in this regard-that the mandatory use of Bitcoin will increase El Salvador’s financial transparency. As a result, Bukele’s bold Bitcoin strategy is likely to trigger greater scrutiny of El Salvador and Bitcoin in the near future.
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