Crypto Group Warns Regulators Against Expanding Stablecoin KYC

The crypto advocacy group Blockchain Association is urging federal regulators to keep identity checks limited to direct relationships between stablecoin issuers and their customers, warning that extending the requirements to peer-to-peer transfers could “cripple the industry.”

In an August 21 comment letter, addressed to the Financial Crimes Enforcement Network, the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corporation, and the National Credit Union Administration, the crypto group responded to customer identification rules proposed by five federal financial regulators under the Guiding and Establishing National Innovation for U.S. Stablecoins, or GENIUS Act.

The GENIUS Act was signed into law in June of last year and establishes a framework for the legal issuance and use of stablecoins, dollar-pegged crypto tokens, in the United States.

Signed by CEO Summer K. Mersinger, a former CFTC commissioner, the Blockchain Association’s letter backed regulators’ decision to exclude secondary transfers from Customer Identification Program requirements while seeking clearer limits on when those requirements apply.

“The agencies are right that customer identification requirements should focus on where issuers actually have a direct relationship with customers: the primary market,” the Blockchain Association wrote on X. “Consistent with the GENIUS Act, they should not extend to downstream, peer-to-peer stablecoin transactions that issuers do not intermediate, facilitate, or approve.”

The proposed federal rules for implementing the GENIUS Act would require stablecoin issuers to verify the identities of direct customers under requirements similar to the Bank Secrecy Act. Such identity checks are known as KYC, or “know your customer” requirements. The Blockchain Association said those checks should not extend to wallet-to-wallet transfers, one-off redemptions, technology providers, or an issuer’s unrelated businesses, arguing that broader requirements could be “nearly impossible” to enforce and “cripple the industry.”

The letter follows an amicus brief sent by the Blockchain Association last week urging the Supreme Court to review a dispute where a federal appeals court ruled that the Federal Reserve could deny a state-chartered crypto bank access to its payment system.

The association also sought protections for issuers that rely on regulated financial institutions to perform identity checks. An issuer that reasonably relies on another institution’s Customer Identification Program should not automatically be liable if that institution fails to meet its obligations, the group said.

The Blockchain Association also wants regulators to allow newer methods of identity verification.

“In addition to clarifying certain key definitions, the final rule should avoid duplicative compliance requirements and clarify that issuers have flexibility to use modern, secure methods to collect and verify customer information, including digital identity tools and other interoperable technology,” they wrote.

The association also asked regulators to coordinate the rules with pending anti-money laundering and sanctions requirements from the Financial Crimes Enforcement Network and the Office of Foreign Assets Control, arguing that staggered deadlines could force issuers to update their compliance systems repeatedly.

“The GENIUS Act created a landmark framework for payment stablecoins,” the Blockchain Association said. “Implementation should preserve its goals: strong safeguards, workable rules, and room for continued innovation.”