Regulatory headwinds force Sam Altman-backed stablecoin Reserve to halt key services in Venezuela and five other countries

The decision reflects the growing difficulty that U.S. crypto firms face in offering financial services, although Reserve executive Gabriel Jiménez said that the company is working to build a more sustainable operating model in Latin America, including securing a key license from the U.S. Treasury Department.

Crypto advocates have long touted Venezuela as an ideal sandbox for digital assets. With tight capital controls and hyperinflation of around 400%, Venezuelans are keen to hold currencies that maintain their value—with crypto tokens offering one potential hedge against the country’s deteriorating financial situation.

In response, Reserve worked to secure a foothold in Venezuela. Founded by the American entrepreneur Nevin Freeman and backed by funders including Sam Altman of OpenAI fame, as well as Peter Thiel and Y Combinator, Reserve offers a proprietary stablecoin pegged to the U.S. dollar, as well as an app—which it refers to as Rpay—that allows users to transfer between fiat currency and its stablecoin.

The app grew popular in Venezuela, amassing around 500,000 users who used the service to transact with each other, as well as the roughly 26,000 merchants who accept Reserve as a form of payment, according to the company. Reserve also inspired a loyal community of volunteers across the country who drove growth in exchange for rewards from the company. Its strategy in Venezuela was developed by Gabriel Jiménez, the CEO of Rpay and the former developer of Venezuela’s ill-fated, government-backed crypto program Petro.

Despite the success of the service, Reserve faced opposition from crypto regulators in Venezuela, who sought to ban any promotion of the app, as well as from the U.S. government, which has severe limits on U.S.-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 in 30 days in six Latin American countries: Argentina, Colombia, Peru, Venezuela, Ecuador, and Panama.

“I share the exasperation and annoyance of feeling trapped in an unjust and broken financial system,” he wrote.

In an interview with Fortune, Jiménez said that the suspension represents a temporary roadblock for Reserve, although he believes the company will be able to offer more secure services in Venezuela, and globally, in the near future thanks to recent cooperation with the U.S. government.

A stablecoin for Latin America

Unlike other stablecoins such as USD Coin that are backed by U.S. dollar-equivalent assets, the initial Reserve stablecoin product—called RSV—was backed by a basket of other stablecoins, including TrueUSD and BUSD, that could reconfigure based on external market conditions, including depeggings.

Reserve users in Latin America could transfer between their local currencies and RSV using the app, where brokers would sit in the middle to facilitate the money transfers, earning a small commission in exchange. In Venezuela, users would hold RSV in their wallets either to transfer back and forth or use it in stores.

After U.S. regulators effectively shut down the Binance-backed BUSD, and after a recent banking crisis caused USDC to depeg from $1, Reserve switched in March to a different proprietary stablecoin called eUSD, which is backed by two forms of both USDC and Tether. According to Jiménez, eUSD is overcollateralized, meaning it can compensate for any partial losses that come from de-pegging events and is designed to automatically rebalance collateral in the event of default events.

Stablecoin depegs have proven to be the least of Reserve’s worries, however. The company had found a niche in Venezuela, which is one of the most difficult operating environments for U.S. firms. Thanks to tense relations between the two countries and an extensive sanctions regime from the U.S., financial firms like Reserve are strictly limited in who they can onboard, to ensure that users do not include Venezuelan government employees. Jiménez said this has meant Reserve has had to block any new users for the past year.

Last Thursday, Reserve announced it had secured a key license from the U.S. Treasury Department’s Office of Foreign Asset Control that helps ameliorate the sanctions risks for Reserve. Although the company still cannot onboard high-ranking government officials, it has more flexibility with lower-level employees. The license is similar to one held by other financial firms operating in Venezuela, including Western Union and Visa.

According to Jiménez, Reserve had a low likelihood of securing the license, especially as a crypto company, but its humanitarian mission of supporting financial autonomy and remittances for Venezuela helped the application process. The Treasury Department did not immediately respond to a request for comment.

Despite the positive development in Venezuela, Reserve decided to temporarily suspend its fiat on and off-ramps in the country, as well as in other Latin American countries, where customers typically use Reserve to transact with Venezuelan users—there is a high population of Venezuelan migrants across the region.

With banks restricting crypto firm services in the U.S., Jiménez said that 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 U.S. and internationally, to handle currency conversion, with Jiménez said will be a more stable solution long-term.

Reserve is looking to launch the new model with banking partners in the U.S. in the last quarter of 2023, although Jiménez does not know when it will be available in Venezuela, which will require partnerships with local banks. The company will also have to deal with hostile regulators in Venezuela, who recently instituted a temporary ban on crypto mining.

“We had to prioritize where to focus our attention,” he told Fortune, arguing that it had to finalize its licensing process with OFAC before beginning the search for Venezuelan banking services. “We are using crypto as a means, not as the end goal.”