The Bank Policy Institute and The Clearing House Association submitted a comment letter addressing a proposal by the Financial Crimes Enforcement Network and Office of Foreign Assets Control (the “Agencies”) proposed rules to implement the GENIUS Act’s illicit finance requirements for payment stablecoins. While the Associations support some aspects of the proposal, they argue the rules would not effectively address risks arising from the secondary market for payment stablecoins, where the Agencies themselves acknowledge most illicit activity occurs. The Associations generally agree with the proposal’s distinction between primary-market activities, such as issuance and redemption, and secondary-market transfers of stablecoins. They contend, however, that the proposed anti-money laundering, countering the financing of terrorism, (AML/CFT) and sanctions obligations are concentrated too heavily on stablecoin issuers while leaving significant regulatory gaps for exchanges, custodians, digital asset service providers, and decentralized market participants. They recommend the Agencies clarify and strengthen compliance obligations for these secondary-market actors.

Additionally, the Associations support the proposed risk-based and cost-benefit approach to AML/CFT requirements for stablecoin issuers, and recommend that the Agencies ensure the final rules adopted for stablecoins are consistent with broader AML/CFT regulatory reforms currently in process. The Associations also request clearer guidance on sanctions obligations for stablecoin issuers as to transactions on the secondary market, particularly where issuers lack sufficient location information to identify prohibited counterparties in blockchain-based transactions. Lastly, the letter suggests clarifications to the regulatory text, including to key terms left undefined by the GENIUS Act or the proposed regulations, such as “seize,” “freeze,” and “burn.” To read the full letter click here.