A stablecoin may pass through several wallets and intermediaries before someone tries to turn it back into dollars. Federal regulators now have to decide which of those relationships requires someone to know who’s on the other side, and when.
That issue runs through comments on the proposed customer identification program, or CIP, for permitted payment stablecoin issuers under the GENIUS Act. The comment period closed Aug. 21 on the joint proposal from FinCEN, the Federal Reserve, FDIC, OCC and NCUA. The proposal would require issuers to maintain a written CIP appropriate to their size and business and establish procedures for identifying and verifying customers.
The proposal starts from a familiar banking concept: CIP generally attaches when a financial institution establishes a customer relationship. Stablecoins make the perimeter harder to define because an issuer can mint a token for one customer and subsequently have no relationship with the people or businesses that acquire it downstream.
KYC After the Stablecoin Leaves the Issuer
The agencies proposed limiting an issuer’s CIP obligation largely to primary-market relationships rather than requiring the issuer to identify every subsequent holder.
The comments reviewed by PYMNTS generally support keeping an issuer’s CIP obligation tied to its own customer relationships rather than every subsequent stablecoin holder. A separate issue is what identification requirements apply when a secondary-market intermediary establishes its own customer relationship with a stablecoin holder.
The Bank Policy Institute and The Clearing House Association took note in their letter last week that regulators should say explicitly that CIP requirements apply to customer relationships established by secondary-market intermediaries. Their letter points to digital asset service providers, including exchanges and custodians, that facilitate stablecoin transactions but may operate under different identification requirements.
BPI and TCH also point to what they see as a regulatory gap between banks and some digital asset intermediaries: money services businesses are subject to Bank Secrecy Act (BSA) requirements but aren’t subject to the same formal CIP rule that applies to banks.
“Although the proposal applies exclusively to PPSIs, we urge FinCEN to ensure that the BSA’s CIP rules apply equally to all secondary market actors in the digital asset ecosystem that maintain account-like relationships with their customers,” the letter states.
America’s Credit Unions approaches the same problem from the issuer side. It says imposing issuer CIP obligations on secondary-market activity can be impractical because the issuer may have little or no access to the information required to identify the holder.
The group wants regulators to spell out the treatment of wallet-to-wallet transfers, custodial and non-custodial wallets, exchange-mediated transactions, third-party technology providers and smart contracts. “We seek clarity around which party is liable for compliance violations when a PPSI leverages another institution’s CIP,” the organization wrote.
The policy question, then, isn’t whether every stablecoin transaction requires the issuer to repeat know your customer (KYC) screening. It’s which regulated intermediary has a customer relationship that triggers its own identification obligations.
Redemption Blurs the Boundary
Redemption creates a different problem because someone who acquired a stablecoin in the secondary market can eventually interact directly with the issuer.
The proposal recognizes that ownership of a stablecoin alone doesn’t necessarily create an account. But once the holder approaches the issuer for redemption, regulators have to determine whether that transaction establishes the type of relationship that requires full CIP.
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The New York Credit Union Association advocated a tiered approach. It proposes full CIP for primary-market customers and secondary-market holders that establish continuing relationships with an issuer, while allowing a more limited process for one-time or occasional direct redeemers. That process would still collect core identifying information and preserve sanctions and government-list screening.
Circle contends in its letter that that requesting redemption alone shouldn’t make a secondary-market holder a customer. Under its proposal, customer status would arise when the holder actually completes the issuer’s onboarding and identity verification process.
Those distinctions have operational consequences. A rule requiring full onboarding before redemption creates another compliance event at the end of a stablecoin’s circulation, even if another institution already identified the holder.
When Another Institution Already Knows the Customer
That leads to a third issue: whether one regulated institution can rely on another’s work.
America’s Credit Unions describes situations in which a correspondent institution handles redemption after a stablecoin has changed hands multiple times. In that case, it argues, “the CIP function should reside with the correspondent institution rather than the issuer” because the correspondent has the direct relationship with the person redeeming the stablecoin.
It also wants subsidiary issuers to be able to use CIP performed by parent institutions and asks regulators to clarify who is liable when an issuer relies on another regulated institution or third party.
That reliance issue matters to banks that may issue stablecoins through subsidiaries or participate as custodians, correspondents or other intermediaries. Requiring every participant to start customer verification from scratch could produce several KYC checks around the same transaction. Allowing reliance without clear responsibility could create gaps when verification fails.
The rulemaking also gives regulators an opportunity to decide how much of the existing identification process has to depend on traditional documents.
America’s Credit Unions wants the rules to remain technology neutral while permitting digital identity tools and verifiable credentials. The New York Credit Union Association similarly supports government-issued mobile identification and trustworthy digital credentials as possible documentary or non-documentary verification methods.
The underlying challenge remains an institutional one. A digital credential can make it easier to establish who someone is. It doesn’t determine which institution is required to ask.
As regulators move toward a final rule, they’ll have to map those obligations across a stablecoin’s lifecycle: issuance, secondary-market trading, custody, wallet transfers and redemption. The comments show that defining the issuer’s customer is only the starting point.