Crypto Group Urges Regulators to Keep Stablecoin KYC Away From Wallet Transfers

The Blockchain Association has urged federal regulators to maintain a distinction between stablecoin issuers subject to regulation and the decentralized networks where their tokens circulate. In a recent letter, the digital-asset trade group endorsed proposed rules requiring permitted payment stablecoin issuers to maintain customer identification programs, akin to those used by banks.

However, the association cautioned that these requirements should be strictly limited to primary-market relationships where the issuer interacts directly with a customer. Extending these customer-identification obligations to downstream wallet transfers could "cripple the industry," the group warned. The proposed rules, issued jointly by key agencies including FinCEN, OCC, Fed Reserve, FDIC, and NCUA, implement a provision of the GENIUS Act mandating identity verification for account holders.

The association supports defining "account" around the existence of a formal relationship between an issuer and a customer, applicable at centralized points such as issuance, fiat conversion, reserve management, and certain redemptions. Downstream transfers, where stablecoins move directly between wallets without the issuer's involvement, function differently.

In these cases, an issuer typically has no contractual relationship with either party, no custody over the stablecoins, and no ability to perform real-time KYC checks. The GENIUS Act requires issuers to verify account holders, but the association argues it does not authorize regulators to make issuers responsible for identifying every subsequent holder or transfer of their tokens.

While the proposal excludes secondary-market activity, the agencies sought feedback on whether the final rule should further exclude such activity, making preservation of this exclusion a key issue in rulemaking. The association also seeks clearer definitions for interactions that should not create an account relationship, including one-time redemption requests, redemptions processed through other regulated financial institutions, data-processing and transmission services, vendor relationships, and other commercial partnerships.

Companies issuing stablecoins as digital-asset service providers should not have unrelated exchange, transfer, or custody activities pulled into the issuer-specific rule, the association added. It also requested a liability safeguard for issuers relying on customer identification conducted by federally regulated institutions, stating that issuers should not be automatically liable if the institution fails to meet its own obligations.

Lastly, the association urged regulators to align the rule's effective date with upcoming FinCEN and OFAC requirements for AML, terrorist-financing, and sanctions compliance, warning that staggered deadlines could force issuers to rebuild compliance systems repeatedly. The core message is that stablecoin regulation should follow control, with KYC obligations appropriate when attached to direct customer relationships but potentially overwhelming when extended across decentralized wallet activity.