Published: July 2nd, 2021
El Salvador made waves last month when it announced plans to make Bitcoin a national legal tender. Spearheaded by president Nayib Bukele, the small Central American country would become the first in the world to accept Bitcoin everywhere for any mainstream commercial transaction.
However, making the ambition a reality would need the technical assistance of partners like Chicago-based Strike, whose digital wallet is popular with US-based Salvadorans.
Those plans are being called into question by concerns that Strike lacks the necessary licensing and permissions to operate across the United States.
Recent media reports have suggested that Strike, and its parent company Zap Solutions, doesn’t have the state-by-state licenses it needs to operate as a facilitator of cross-border transactions. Legal experts say that, if true, it means many of the cash and crypto transfers being made to El Salvador via Strike are likely illegal.
That could cloud prospects for a fast rollout of El Salvador’s already controversial Bitcoin plans.
Strike CEO Jack Mallers is known to have a close relationship with President Bukele and recently introduced him to the crowd at a crypto conference in Miami, where he spoke about the country’s plans for BTC.
It’s understood that Mallers first suggested that Strike, a Venmo-like payment platform, could be integral to El Salvador's embrace of Bitcoin. The company’s digital wallet lets users swap quickly between cryptos and fiat currencies. The technology is integrated with payments systems, meaning it can help Salvadoran businesses comply with the government’s decree that Bitcoin must be accepted as a form of payment across the country.
Founded in 2019, Mallers’ company has raised over USD 19 million for its primary product, which lets users conduct transactions through Lightning, an extension to the Bitcoin network.
Describing his latest initiative, Mallers told Reuters that Strike is helping El Salvador democratise finance and build ‘the most inclusive financial infrastructure anywhere in the world.’
Strike is an ambitious Bitcoin startup in a special category, classified as a ‘money transmitter’ under US law. It’s a term with regulatory and legal significance.
Companies in the category have to register with FinCEN, the federal agency charged with policing crimes like money laundering and financing terrorism.
According to the Zap and FinCEN websites, Strike is ‘available in every state except Hawaii and New York. But while Zap may have registered with FinCEN, that’s only the beginning of a much longer process.
To operate in America's financial system, money transmitters need to be licensed by the appropriate state-level body in every jurisdiction — e.g. all 50 US states except Montana. Recent media reports suggest that Strike’s parent company, Zap, has not done this.
Analysis of records on the federal government’s NMLS company registration portal has shown that Zap is only licensed to operate in Washington state. That’s probably because Washington has the lead role in a new streamlined state-by-state financial licensing process.
In the past, registration for startups was weighed down by bureaucracy and took ages to complete. The new process is faster, but getting a license approved in Washington state is only the first step. Strike will still need to work through applications to other states and ask each one for a permit.
It appears that process hasn’t yet begun. If so, it means Strike is operating in large parts of the US without the required permissions.
Legal analysts have said that there are exceptions where a money transmitter might not need state licenses. A company may have built its services in a way that accommodates certain licensing exemptions, or it may have applied for full status as a bank. It’s not clear whether Zap or Strike have pursued either of those options.
The uncertainty has led to speculation that Strike might be cutting corners on its regulatory obligations, a behaviour pattern that’s common in the fast-moving world of tech startups.
But when it comes to American financial law, or flouting measures designed to battle terrorism and organised crime, operating without the requisite licenses could have painful consequences.
Having state-by-state money transmitter licenses confirms that a business has an approved anti-money laundering system, has passed the threshold for minimum net worth, and conducts background checks on users and transactions.
A recent report by consultancy firm Sia Partners says that federal regulations are meant to stop money laundering and ensure financial security. However, state-level money transmission licensing is more about protecting consumers and assessing the solvency of the applicants.
For any would-be money transmitter operating anywhere, those requirements set up several process hoops that need to be navigated. When you factor in the significance of Strike's future role in El Salvador’s embrace of Bitcoin as a form of legal tender, skirting licensing requirements raises concerns. On top of that, El Salvador’s past issues with corruption have to be considered.
Without the proper licenses to signal credibility and soundness, users can’t be confident a company is living up to anti-money laundering obligations. For tiny El Salvador, whose economy depends heavily on a steady flow of remittances from US-based ex-pats, depending on an allegedly un-licensed product like Strike could stymie its Bitcoin ambitions.
The country is already being investigated for financial misdeeds. The 2020 Corruption Perceptions Index scores El Salvador a measly 36/100 for anti-corruption measures, ranking it behind Columbia and Brazil and just two rungs above scandal-stricken Panama. El Salvador was also placed on a terror watch list by former President Donal Trump for supposedly allowing elements of the notorious MS-13 gang to infiltrate the US.
Those supporting El Salvador’s move to make cryptocurrency a national legal tender see it as a game-changer that will pave the way for crypto’s full inclusion in global financial systems. In the short term, however, Bukele’s bold Bitcoin gambit could mean closer scrutiny of both El Salvador and Bitcoin.