FED proposes mandatory identity checks for stablecoin users! What are the key changes?

The US Federal Reserve (FED) has unveiled a draft regulation that would, for the first time, require cryptocurrency companies operating in the country to verify the identities of stablecoin users. The proposal aims to clarify how existing anti-money laundering (AML) and customer identification rules apply specifically to services involving stablecoins, in an effort to curb risks related to money laundering and illicit financing.

New identity obligations for stablecoin companies

Developed jointly with other authorities, including the Treasury Department and the FDIC during Donald Trump’s administration, the draft outlines how customer identification provisions under last summer’s GENIUS Act will be implemented. That legislation established a legal framework for USD-pegged stablecoins and formalized their issuance in the US market.

According to the draft, anyone or any company considered a “digital asset service provider” will be required to take specific steps to comply. This covers US-based individuals and entities that buy, sell, transfer, or provide custody services for cryptocurrencies. Companies must introduce additional controls to prevent their stablecoin-related services from being misused by criminal organizations or other illicit actors.

These rules stipulate that companies must validate essential customer details like full name, date of birth, and residential address. In addition, these details must be screened against government lists of designated terrorists and sanctioned entities as part of compliance.

Notable abstention at FED board vote

Most members of the FED’s board of governors have expressed support for the draft regulation. The document notes that former FED Chair Jerome Powell was among those who approved the proposal. However, current FED Chair Kevin Warsh abstained from the vote, drawing attention.

Warsh did not provide any statement explaining his abstention, and a FED spokesperson has yet to respond to requests for comment. This silence has fueled speculation about underlying debates within the institution regarding the specifics of the proposal.

Controversy over decentralized protocol exception

A segment of the draft regulation that exempts decentralized protocols from these requirements has sparked criticism among some officials. This exemption appears both in the proposed regulation and in the GENIUS Act itself, raising concerns over regulatory loopholes.

Michael Barr, a frequent contributor to regulatory deliberations at the FED, stated that while he supports releasing the draft, the current regulatory framework may prove inadequate when it comes to illicit financing threats emerging through secondary market activity involving payment-focused stablecoins.

Public comment period commences

The FED’s proposal will now enter a 60-day public consultation phase. During this period, industry representatives, legal experts, companies, and other stakeholders will have an opportunity to submit their feedback on the draft regulation. Whether or not any modifications will be made to the final text will be determined once this review process concludes.

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