Square’s Bitcoin payments: Supervision, Tax clarity, and Compliance hooks
Square’s Bitcoin payments framework is usable, cheaper, and governable. It delivers the appearance of mass adoption while ensuring supervision, tax clarity, and compliance hooks remain intact.
Square has officially launched Bitcoin payments for its 4 million U.S. merchants.
You might have noticed that the Controllers don’t like decentralization and non-KYC’ed coins very much, so we’ll analyze the implications.
How Square’s Bitcoin Payments Actually Work
1) System Overview
Where it lives:
Merchants enable Bitcoin payments directly in the Square Dashboard under “Bitcoin Payments” (with an optional “Bitcoin Conversions” setting).
It appears alongside other checkout options like cards or Apple Pay.
Importantly, Square — not the merchant or customer wallet — is the counter-party.
Transaction flow options:
BTC → BTC: Customer pays in Bitcoin; seller keeps Bitcoin.
BTC → Fiat: Customer pays in Bitcoin; seller auto-settles to U.S. dollars (or local fiat).
Fiat → BTC: Customer pays in cash or card; seller auto-converts a set percentage of daily sales to Bitcoin.
Fiat → Fiat: Normal processing; no Bitcoin involved.
Fees:
Square is waiving all processing fees through the end of 2026.
Starting January 1, 2027, a 1% fee will apply — still materially below standard card merchant discount rates (2.5–3.5%).
Rails:
Payments use the Lightning Network for speed, with on-chain Bitcoin supported for larger or slower transactions.
KYC and traceability:
All transactions flow through Square/Cash App’s KYC/AML perimeter, meaning both sides of the payment are verified.
Receipts and ledgers integrate directly into accounting exports for tax reporting.
(Cash App users are already identity-verified for Bitcoin functionality.)
2) The Strategic Design: Control by Containment
1. Contain-and-channel, not “set Bitcoin free”.
The system looks pro-Bitcoin, but all the control knobs remain inside Square’s perimeter:
Identity, settlement, refunds, and audit trails are handled off-chain by Square.
If a merchant defaults to BTC → Fiat, each Bitcoin sale boosts usage statistics while reducing circulating self-custodied supply.
Implication:
Bitcoin appears to function as a medium of exchange (MoE), but value is contained within a supervised funnel.
Self-custody and circular Bitcoin economies remain peripheral.
2. A Fee War with Card Networks — Funded by Optionality
Square’s 0% processing through 2026 (and 1% after) directly undercuts Visa and MasterCard.
The goal: onboard millions of merchants into a Square-controlled Bitcoin tender ecosystem before competitors adapt.
The 1% still covers risk, fraud, and compliance operations — shifting fraud management from post-dispute charge-backs to pre-transaction screening via KYC, device data, and blacklist systems.
Implication:
This pressures card networks’ margins while regulators retain leverage: Bitcoin commerce stays identity-bound and traceable.
3. “No Chargebacks” ≠ No Recourse
While Bitcoin transactions are final on-chain, Square can simulate recourse at the account level:
It can refund merchants, reverse payments internally, or blacklist users.
Implication:
Merchants enjoy finality (no charge-back fees), while regulators still get behavioral control at the platform layer — a state-friendly balance.
4. Tax Clarity Biases Merchants Toward Fiat Settlement
Keeping Bitcoin on the balance sheet triggers capital-gains accounting when sold.
Fiat settlement, however, counts as ordinary revenue — far simpler.
Square’s clean export tools make tax filing easy, but also nudge merchants to auto-convert.
Implication:
Most sellers will likely settle in fiat, reducing true Bitcoin circulation.
Only a minority will hold Bitcoin as treasury exposure.
5. Lightning + KYC = “Fast but Filtered”
Lightning enables instant, low-cost payments — but Square runs the routing and risk infrastructure.
Regulators can easily restrict liquidity to KYC-verified participants.
Implication:
The “fast lane” gradually becomes the filtered lane, aligning speed with supervision.
6. Data Exhaust Becomes the Product
Every Bitcoin payment generates identity-linked transaction data: buyer, location, device, and amount.
That data fuels risk scoring, fraud models, blacklist propagation, and targeted marketing.
Implication:
The surveillance value, not the 1% fee, becomes Square’s enduring moat.
7. Regulatory Signal: “We can govern Bitcoin Commerce without Bans.”
The revealed preference is clear —
Instead of outlawing Bitcoin payments, regulators domesticate them within licensed payment-service-provider (PSP) frameworks.
This model becomes a template for future stablecoin or CBDC integrations: same dashboard, different token.
3) Winners and Losers
Winners
Block (Square’s parent):
Gains merchant lock-in across payments, banking, and Bitcoin conversions, plus valuable transaction data.
Positions itself as a low-fee Bitcoin-enabled acquirer with optional compliance modules.Regulators and Controllers:
Obtain full visibility into Bitcoin commerce without needing prohibitions; leverage remains at the PSP and app-store layer.Merchants:
Enjoy lower fees, no charge-backs, and the ability to market “We accept Bitcoin” while managing conversion risk.
Conditional Winners
Bitcoin price:
Short-term headline boost from “mass adoption”.
Long-term impact depends on retention — if 70%+ of flows convert to fiat, the effect is mostly optical, not structural.
Losers
Self-custody advocates:
A shrinking share of real-world Bitcoin commerce occurs off KYC rails.
“Adoption” statistics increasingly reflect supervised usage.Card networks:
Margins face slight erosion if merchants route high-volume cohorts to “1% BTC” checkout — unless Visa/MasterCard evolve into the compliance backbone for these flows (a plausible pivot).
4) Frictions and Unspoken Risks
“Unhosted-wallet” choke points:
Square can quietly restrict non-KYC wallets — introducing “delays” or “limits” that steer users back to compliant flows.Policy-shock exposure:
One subpoena or regulatory change could alter refund or blacklist behavior overnight, transferring unseen policy risk to merchants.Narrative trap for Bitcoin:
Adoption headlines may sound bullish but represent fiat-settling activity — good optics, poor circularity.
The ecosystem looks vibrant, but genuine self-custody liquidity stagnates.
5) But how is the Buyer side KYC’ed
I previously told you:
All transactions flow through Square/Cash App’s KYC/AML perimeter, meaning both sides of the payment are verified.
So how is the buyer side KYC’ed? Can’t they just use a non-KYC Lightning wallet?
Short answer: the “buyer side is KYC’d” whenever the payer uses Cash App (or Cash App’s new “pay LN with USD” feature). That’s the intended path Square pushes — and most real-world buyers will take it. Could you try a non-KYC Lightning wallet? Sometimes yes — but (a) many sellers will configure Square to only accept Cash App, (b) even when “any Lightning wallet” works, you’re still inside Square’s compliance perimeter (their node, their risk rules), and (c) refunds/receipts/chargeback-style issues shove you back toward an identified account anyway.
Here’s how it breaks down:
Default funnel = Cash App (KYC). Square’s own flow is Cash App ↔ Square. Cash App accounts are identity-verified, and Cash App can even auto-convert USD to pay a Lightning invoice — which requires a Cash App (KYC) balance. That’s why, in practice, the buyer side is identified.
“Any Lightning wallet” is sometimes allowed — but optional. Square’s merchant page says customers can pay “with any Lightning-enabled wallet, like Cash App”. That’s a policy choice: many larger merchants will toggle settings, train staff, and design receipts/refunds to require Cash App, because it simplifies support, refunds, and fraud tooling.
Even if a non-KYC wallet pays, you’re not outside the perimeter. The payment still terminates at Square’s Lightning node; Square can apply sanctions/risk screening, node blacklists, and routing rules before accepting settlement. You’re not handing coins peer-to-peer to the merchant; you’re paying an invoice controlled by a regulated processor.
Receipts, refunds, disputes = identity gravity. Merchants want itemized receipts and clean refund rails. Square’s best UX for that is Cash App (signed receipts, refund handle). If you used a throwaway wallet, you’ll often be asked to prove ownership or provide an identified refund method — pushing you back into KYC.
On-ramp reality: most BTC used by mainstream shoppers comes from KYC on-ramps anyway. Even if you spend from a self-custody wallet, prior exchange linkage and common heuristics make you de-facto identifiable to compliance teams.
Square’s design serves both sides of the counter — Cash App for buyers, Square for sellers — so the normal path is KYC ↔ KYC. A non-KYC wallet may work where enabled, but it’s the exception, not the standard; operationally and legally, the flow still sits inside Square’s gate.
6) Bottom Line
Square’s Bitcoin payments framework is usable, cheaper, and governable — by design.
It delivers the appearance of mass adoption while ensuring supervision, tax clarity, and compliance hooks remain intact.
It’s containment via convenience:
Bitcoin gets volume, regulators get visibility, and merchants get lower fees —
but self-sovereign use quietly loses market share.