US Treasury introduces compliance requirements for stablecoin issuers

The United States Treasury has put forward a detailed framework for stablecoin issuers to comply with sanctions and anti-money laundering (AML) regulations. On April 8, the Financial Crimes Enforcement Network (FinCEN) and the Office of Foreign Assets Control (OFAC) jointly released a Notice of Proposed Rulemaking (NPRM) under the GENIUS Act, setting the stage for a comprehensive regulatory regime that will take full effect in January 2027.

This proposal outlines stringent compliance measures that permitted payment stablecoin issuers (PPSIs) must implement to combat illicit financial activity.

Details of the Compliance Framework

The NPRM establishes clear expectations for PPSIs, aligning their obligations with those of traditional U.S. financial institutions. The requirements include:

• Developing AML/CFT and sanctions compliance programs with oversight from senior management.
• Conducting financial crime risk assessments.
• Implementing risk-based customer due diligence policies and procedures.
• Appointing an AML/CFT officer to manage compliance obligations.
• Establishing employee training programs and arranging for independent audits of compliance systems.

Additionally, PPSIs must address risks related to their relationships with third parties, such as cryptoasset exchanges, by adhering to correspondent banking requirements under Section 311 of the USA PATRIOT Act.

sbb-itb-e766981

Addressing Risks in Stablecoin Operations

The proposed rules emphasize the importance of evaluating the risks associated with stablecoin tokens and their underlying blockchain networks. Issuers are expected to regularly update their risk assessments, particularly when changes are made to smart contract functionality or a stablecoin is deployed on a new blockchain.

The NPRM also draws a distinction between primary and secondary market activity. While PPSIs are expected to closely monitor their primary market activities and file suspicious activity reports (SARs), the requirements for secondary market activities are less stringent. FinCEN recognizes that PPSIs are not well-positioned to detect suspicious activity in secondary markets, and excessive reporting could lead to filings of limited intelligence value.

However, FinCEN has identified two crucial areas where PPSIs must take active measures in secondary markets:

1. Freezing or Blocking Transactions: PPSIs must be able to freeze, block, or reject funds in response to lawful orders, such as law enforcement or court mandates to seize stablecoins.
2. Sanctions Compliance: Issuers are required to prevent their stablecoins from being used by sanctioned parties or individuals in jurisdictions under OFAC sanctions. This includes ensuring that transactions involving OFAC-sanctioned parties or unhosted wallets associated with such parties are blocked.

The NPRM suggests that PPSIs leverage blockchain analytics and smart contract programming to identify and prevent unlawful transactions, ensuring compliance with U.S. sanctions laws.

Public Consultation Period

The proposed rule is open for public comment for 60 days following its publication in the Federal Register. These comments will help FinCEN and OFAC refine the final rule to ensure its effectiveness in combating financial crime.

Broader Regulatory Efforts

The NPRM is not the only regulatory development related to the GENIUS Act. On April 1, the Treasury released a separate NPRM outlining standards for evaluating state-level adherence to GENIUS Act requirements. Additionally, the Federal Deposit Insurance Corporation (FDIC) issued a proposal on April 7 detailing a supervisory framework for PPSIs. FinCEN is also consulting on broader revisions to its AML/CFT regime to focus on operational effectiveness rather than technical compliance.

As regulators continue to craft the final framework, stablecoin issuers will need to prepare for the upcoming changes by enhancing their financial crime compliance measures. These efforts aim to ensure that the growing stablecoin market operates in a secure and transparent manner while mitigating risks to the financial system.

Read the source