The Hidden Pitfalls of Encryption Payments: Why You Must List the "Restricted Area List"

Written by: Shao Jiadian, Chen Haoyang

Introduction

In the past two years, crypto payment has gradually shifted from a niche concept to a global trend.

Its forms are varied and diverse:

Stablecoin payments (settlement in USDT/USDC)

Crypto Debit Card (commonly known as U Card)

Cross-border cryptocurrency salary distribution

On/Off-ramp Gateway (Crypto ⇄ Fiat)

Encrypted version of Stripe or PayPal

The common point of these projects is: using crypto assets to solve the slow and expensive cross-border payments.

However, unlike pure trading platforms, crypto payments directly engage with funds flow, bank cards, bank accounts, and fiat clearing systems.

It is not “DeFi”, but a mixture of half finance and half technology.

Therefore, all “geographical risks” will be magnified here.

Many teams, while excited about the licensing structure, product experience, and growth in trading volume, overlook a seemingly technical question—who can use it?

This is not a market choice, but a compliance baseline.

Why must certain countries and regions be excluded?

1. Because every country is guarding its own “payment sovereignty”

Cryptocurrency payments are often legally regarded as: “electronic currency issuance”, “fund transfer services”, and “payment clearing activities.”

This means that as long as your system allows local residents to deposit, withdraw, or spend cryptocurrency assets, it may trigger local regulatory approval.

For example:

United States: Requires registration for MSB + Money Transmitter License (MTL).

EU: CASP authorization is required under MiCA, and a local entity must be established in member states.

Singapore: Regulated under the Payment Services Act, involving MPI+DPT license.

Hong Kong: Requires MSO or upcoming VA Dealing, Stablecoin issuance license.

If you allow local users to use your cryptocurrency payment feature without these licenses,

Regulatory authorities will directly view this as “operating payment services without authorization within the jurisdiction.”

2. Because the international sanctions system is a “collective punishment system”

Once the system allows users from sanctioned regions such as Iran, North Korea, and Syria to register or trade, whether you are registered in BVI or Estonia,

As long as the international clearing system (banking, VISA, Mastercard, SWIFT) is used, it may be considered as sanctions evasion.

The consequences of being blacklisted are not fines, but rather the termination of financial life:

The bank account is frozen;

The card issuing channel is immediately disabled;

Settlement funds cannot be settled;

The sponsor bank has terminated the cooperation.

Practical advice: The system should implement a “triple filtering”:

1. IP Blocking: GeoIP identifies the source of access;

2. KYC Nationality Verification: ID/Passport Country;

3. Residence Cross-Verification: Utility bills or bank letters.

This is not a form, but a condition for survival.

How are institutions doing it in the market?

The common point of these companies is: “First partition, then expand.”

It is not a single license that governs everything, but rather the use of multiple licenses and multiple entities to isolate different risk areas.

The core logic of encrypted payments is “regulatory geographical isolation.”

Negative example: The cost of not having geographical isolation

Paxful (peer-to-peer payment platform)

Reason: Failed to effectively block users from Iran and Russia;

Consequences: U.S. regulators investigate, and the founder announces the suspension of operations.

Bitzlato

Reason: Allow Russian and sanctioned area users to trade.

Consequences: Sued by the U.S. Department of Justice as a money laundering platform, assets frozen.

Certain U Card projects

Mode: Hong Kong MSO + Overseas Issuing API, but IP blocking not set;

Consequences: The Sponsor bank discovers transactions from users in high-risk areas, resulting in the freezing of clearing accounts and the immediate suspension of the project.

In summary:

Without geographical compliance in crypto payments, it is not an innovative product, but rather “violation of financial services.”

Lawyer's Perspective: How to Build a Compliance Firewall

1. Formulate formal policy documents

Restricted Jurisdictions Policy

Customer Acceptance Policy

“Geo-IP Blocking and Verification Process”

2. Implement a four-layer screening mechanism.

Nationality Verification (KYC)

Proof of Address

Login device IP & GPS detection

Card issuance or payment path tracking

3. Strengthen the review of cooperation partners

Issuing institutions, sponsor banks, and custodians all require a list without sanctioned zone clients.

→Include “compliance guarantee clause” and “ongoing screening obligation” in the cooperation agreement.

4. Dynamic Update Mechanism

Regularly synchronize OFAC / FATF / EU / UN official lists,

And establish an internal list update schedule (quarterly updates are recommended).

Conclusion: The true competitive advantage of crypto payments is “sustainable compliance”.

In the crypto payment sector, the technical barriers are not high; the compliance barriers are the real moat. The faster you can process payments, the quicker regulators can freeze you; the more countries you serve, the steeper the risk curve.

True globalization is not about “anyone can use it,” but about “using it in compliance.”

Geographic exclusion is not about abandoning the market, but about preserving the lifeblood. In the world of cryptocurrency payments, the projects that can survive are not necessarily the fastest runners, but those that understand the boundaries of risk control the best.