On Monday, US-based stablecoin company Reserve announced it was suspending local currency deposits and withdrawals in Venezuela, where it has about 500,000 users, along with five other Latin American countries.
The decision reflects the growing difficulty U.S. crypto companies face in providing financial services, though Reserve Director Gabriel Jiménez said the company is working to build a more sustainable business model in Latin America, including obtaining a key license from the U.S. Ministry of Finance.
Crypto proponents have long touted Venezuela as an ideal sandbox for digital assets. With tight capital controls and hyperinflation at around 400%, Venezuelans are eager to hold currencies that hold their value – with crypto tokens offering a possible hedge against the country’s deteriorating financial situation.
In response, Reserve worked to gain a foothold in Venezuela. Founded by US entrepreneur Nevin Freeman and backed by financiers including Sam Altman of OpenAI fame and Peter Thiel, Reserve offers its own stablecoin pegged to the US dollar, as well as an app – referred to as Rpay – that allows users to switch between fiat currency and its stablecoin.
The app gained popularity in Venezuela, gaining about 500,000 users using the service to transact with each other, as well as the roughly 26,000 merchants who accept Reserve as a payment method, according to the company. Reserve also inspired a loyal community of volunteers across the country who encouraged growth in exchange for rewards from the company. The strategy in Venezuela was developed by Jiménez, CEO of Rpay and former developer of Venezuela’s ill-fated government-backed crypto program Petro.
Despite the service’s success, Reserve faced opposition from crypto regulators in Venezuela, who sought to ban any promotion of the app, as well as from the US government, which has placed severe restrictions on US-based financial firms offering services to Venezuelan government employees . . On Monday, Jiménez informed Rpay users via a blog post that the suspension of local currency withdrawals and deposits would take place within 30 days in six Latin American countries: Argentina, Colombia, Peru, Venezuela, Ecuador and Panama.
“I share the annoyance and annoyance of feeling trapped in an unjust and broken financial system,” he wrote.
In an interview with Fortune, Jiménez said the suspension represents a temporary roadblock for Reserve, though he believes recent cooperation with the US government will allow the company to provide safer services in Venezuela and globally for the foreseeable future.
A stablecoin for Latin America
Unlike other stablecoins, such as USD Coin, which are backed by US dollar-equivalent assets, the initial Reserve stablecoin product – called RSV – was backed by a basket of other stablecoins, including TrueUSD and BUSD, which could be reconfigured at based on external market conditions, including depegs.
Reserve users in Latin America could transfer between their local currency and RSV using the app, with brokers sitting in the middle to facilitate the money transfers and earning a small commission in return. In Venezuela, users would keep RSV in their wallets to transfer back and forth or use it in stores.
After US regulators effectively shut down Binance-backed BUSD, and after a recent banking crisis caused USDC to depeg from $1, Reserve switched to another proprietary stablecoin called eUSD in March, which is backed by two forms of both USDC and Tether. According to Jiménez, eUSD is overcollateralized, meaning it can offset any partial losses that result from depegging events and is designed to automatically rebalance collateral in the event of default events.
However, stablecoin depegs have proven to be the least of Reserve’s worries. The company had found a niche in Venezuela, one of the toughest working environments for American companies. Due to tense relations between the two countries and an extensive US sanctions regime, financial firms such as Reserve are strictly limited in who they can enter, to ensure that there are no Venezuelan government employees. Jiménez said this has resulted in Reserve having to block new users for the past year.
Last Thursday, Reserve announced it had obtained a key license from the US Treasury Department’s Office of Foreign Asset Control that helps mitigate sanctions risks for Reserve. While the company still can’t hire high-ranking government officials, it has more flexibility with lower-level employees. The license is similar to that of other financial firms operating in Venezuela, including Western Union and Visa.
According to Jiménez, Reserve had little chance of winning the license, especially as a crypto company, but its humanitarian mission to support financial autonomy and remittances for Venezuela helped with the application process. “The Treasury Department did not immediately respond to a request for comment,” Morgan Finkelstein, a spokeswoman for the US Treasury Department, wrote. Fortune in an email.
Despite the positive development in Venezuela, Reserve has decided to temporarily suspend its fiat entry and exit points in the country, as well as in other Latin American countries, where customers typically use Reserve to transact with Venezuelan users; there is a large population of Venezuelan migrants throughout the region.
With banks restricting crypto services in the US, Jiménez said Reserve is eliminating its decentralized model of currency conversion, where it relies on independent brokers to transfer between fiat and its reserve through an automated bidding system. Instead, the company plans to work with banks, both in the US and internationally, to arrange currency conversion, which Jimenez says will prove to be a more stable solution in the long run.
Reserve wants to launch the new model with U.S. banking partners in the last quarter of 2023, though Jiménez doesn’t know when it will be available in Venezuela, which would require partnerships with local banks. The company is also facing hostile regulators in Venezuela, which recently placed a temporary ban on crypto mining.
“We had to prioritize where to focus our attention,” he said Fortune, arguing that Reserve should complete its licensing process with OFAC before seeking Venezuelan banking services. “We use crypto as a means, not as an end.”
Update: An earlier version of the article stated that Y Combinator was a backer of Reserve. It’s Sam Altman, who was the president of Y Combinator.
This story was originally on Fortune.com
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