Crypto regulatory affairs: US Treasury proposes secondary market sanctions compliance for stablecoin issuers

In this second April edition of crypto regulatory affairs, we will cover:

The United States Department of the Treasury has published a long-awaited notice of proposed rulemaking (NPRM) that would require stablecoin issuers to implement stringent sanctions compliance requirements under the GENIUS Act.

On April 8, the Treasury’s Financial Crimes Enforcement Network (FinCEN) and the Office of Foreign Assets Control (OFAC) jointly released an NPRM detailing proposed requirements for permitted payment stablecoin issuers (PPSIs) related to combatting illicit finance. The NPRM sets out anti-money laundering and countering the financing of terrorism (AML/CFT) and sanctions compliance measures that PPSIs will be expected to implement once the GENIUS Act regulatory regime becomes fully operational from January 2027.

The NPRM makes clear that PPSIs will be expected to comply with the same set of financial crime compliance obligations that already apply to other US financial institutions, including:

• Requirements to establish AML/CFT and sanctions compliance programs with senior management oversight

• Conduct financial crime risk assessments

• Implement risk-based policies and procedures for undertaking customer due diligence and other measures

• Appoint an individual as a responsible AML/CFT officer

• Maintain an employee training program

• Ensure independent auditing and testing of AML arrangements

Importantly, the NPRM indicates that relationships PPSIs form to provide services to partners, customers and counterparties (such as issuance and redemption arrangements it enters into with cryptoasset exchanges) would be treated as correspondent accounts.

This would require PPSIs to comply with specific AML/CFT requirements related to correspondent banking activity, such as special measures that FinCEN imposes under Section 311 of the USA PATRIOT Act.

In addition to these fundamental requirements, the notice identifies certain aspects of financial crime risk management that are of particular relevance to stablecoin issuers.

For example, when conducting risk assessments of their stablecoin activities, PPSIs should consider how the characteristics of their token smart contract (such as its ability to freeze or block funds) influence its risk profile, and should also consider how features of the underlying blockchains on which the token is traded influence risk. FinCEN expects that issuers would update their risk assessments when they make changes to their smart contract functionality, or when their stablecoin is deployed on a new blockchain.

One area that received significant attention is where the NPRM relates to distinctions in the AML/CFT and sanctions obligations for PPSIs when it comes to primary vs. secondary market transactions.

Primary market transactions are those where the PPSI is a direct party to transactions with stablecoins, typically involving its interactions with distribution partners during the issuance and redemption process, and other transactions with its direct customers and counterparties.

The NPRM makes clear that PPSIs will be expected to comply with all aspects of AML/CFT and sanctions compliance, including requirements to monitor transactions and file suspicious activity reports (SARs), related to their primary market activity.

When it comes to secondary market activity (or activity that the PPSI is not a party to but which occurs via its token smart contract) things become more complicated.

FinCEN has proposed that PPSIs will not be required to monitor secondary market activity for AML/CFT purposes, and that PPSIs will not be expected to file SARs involving secondary markets.

FinCEN contends that PPSIs are generally not in a position to determine whether most secondary market activity is suspicious. Requiring them to identify and report suspicious activity in secondary markets would likely lead to defensive SAR filings of limited or no intelligence value.

However, the NPRM does define two sets of compliance requirements where PPSIs will be obligated to address illicit activity in secondary markets.

Firstly, PPSIs will be expected to have the technical capability to freeze, block or reject funds in secondary markets in response to lawful orders, such as a request by a law enforcement agency or court to seize stablecoins.

Secondly, a PPSI must prevent its stablecoin from being issued to or used by sanctioned parties in secondary markets. This means that the issuer must not allow OFAC-sanctioned persons, or parties located in OFAC-sanctioned jurisdictions such as Iran, to interact with its smart contracts to facilitate payments, including in peer-to-peer (P2P) transactions between unhosted wallets.

The PPSI can therefore be liable for any conduct prohibited by US sanctions that occurs in secondary markets using its stablecoin, and is expected to implement arrangements that enable them to block or reject funds as required by OFAC. The NPRM indicates that PPSIs can leverage capabilities such as blockchain analytics to ensure sanctions compliance, including by programming smart contracts to identify and prevent transactions involving wallets with OFAC-sanctioned parties.

The NPRM will be open for comment from the public for 60 days from the date of its publication in the Federal Register, input that FinCEN and OFAC will use to draft their final rule.

This particular NPRM is not the only piece of relevant US government rulemaking underway related to the GENIUS Act.

On April 1, Treasury issued a separate NPRM setting out proposed standards for evaluating whether state-level regulatory regimes are aligned with the GENIUS Act. 

On April 7, the Federal Deposit Insurance Corporation (FDIC) issued an NPRM setting out a prudential supervisory framework for PPSIs. Separately, FinCEN is also consulting more broadly on proposed rules to overhaul its broader AML/CFT regime by shifting the focus of supervisory assessment and enforcement away from considerations of technical implementation and toward the overarching effectiveness of a firm’s AML/CFT program.

To learn more about how stablecoin issuers can ensure effective financial crime compliance, including through the use of blockchain analytics, read our guide to safely issuing and banking stablecoins.

The ongoing saga over the potential passage of the US CLARITY Act faced a new twist as the administration of President Donald Trump made forceful interventions in recent days to try and boost the legislation toward completion.

On April 8, the White House published research from the Council of Economic Advisers (CEA) — an agency of the Executive Branch that provides economic advice to the President — on the effects of stablecoin yield on bank lending. The topic has been at the center of negotiations over the past three months aimed at advancing the CLARITY Act market structure legislation through the US Senate Banking Committee.

The US banking industry has advocated that the CLARITY Act should bank cryptoasset exchanges and other market intermediaries from offering yield or interest on stablecoin holdings, arguing that stablecoin yield could result in a drop in deposits at community banks and cause a reduction in lending via community banks that would adversely impact commercial and economic activity.

The crypto industry has argued that the banking sector is simply looking to prevent competition, and that banning stablecoin yield would adversely impact consumers by limiting their access to new yield-bearing products.

In recent weeks, the Senate Banking Committee has circulated draft language with bank and crypto industry representatives that would largely support the banks’ perspective by prohibiting the offer of yield or interest on stablecoin holdings, while allowing only limited exemptions for certain types of related activities.

The new CEA analysis, however, appears to support the crypto industry’s perspective that a ban on yield would not protect bank deposits, and would instead undermine consumers.

The CEA’s analysis concludes that a prohibition on stablecoin yield would only increase overall bank lending by approximately by .02%, and that it would impose a cost of $800 million on consumers in the form of lost opportunities to earn yield on stablecoins. According to the CEA, “a yield prohibition would do very little to protect bank lending, while forgoing the consumer benefits of competitive returns on stablecoin holdings.”

Whether the CEA’s findings will tilt the scales and persuade the Senate Banking Committee to adopt an approach that permits stablecoin yield remains unclear, but members of the cryptoasset industry welcomed the analysis and argued that it supports their case.

The analysis also largely supports the largely pro-crypto stance of the White House to date and suggests the administration is seeking to tip the scales, though initial reports suggest the banking industry is skeptical of the analysis and feel it does not address their most significant underlying concerns.

As of the time of writing, Senate Banking Committee members had not officially commented on the CEA’s analysis and have not confirmed any further specific plans to consider the CLARITY Act for a committee vote.

In an effort to light a fire under the Committee, on April 9, US Secretary of the Treasury Scott Bessent published an op-ed in the Wall Street Journal arguing that Congress must urgently work to pass the CLARITY Act ahead of the November 2026 mid-term elections if the US is to establish its position as the global leader in digital asset innovation.

On the same day, US Securities and Exchange Commission (SEC) Chairman Paul Atkins posted a statement on X supporting Bessent’s op-ed and indicating that the SEC is already preparing to implement the CLARITY Act once it is passed by Congress.

The series of coordinated statements from the Executive Branch agencies is a clear attempt to try and push the CLARITY Act towards passage, and to create a growing sense of pressure on Congress to complete its work on the bill.

To read our previous analysis on the CLARITY Act, see here.

In July 2024, FINMA issued guidance on stablecoins that sets out strict standards of compliance for AML/CFT purposes, clarifying that stablecoin issuers are financial intermediaries that are obliged to verify the identity of holders and beneficial owners of stablecoins, including where transactions occur via unhosted wallets.

The Corporation Amendment (Digital Asset Framework) Bill 2025 requires that cryptoasset exchanges, tokenized custody platforms and certain other service providers must obtain an Australian Financial Services License from the Australian Securities and Investments Commission (ASIC), the domestic regulator responsible for oversight of financial services markets.

While cryptoasset exchanges in Australia are already subject to AML/CFT measures, the new legislation subjects a wider range of service providers to more comprehensive regulatory requirements related to market conduct and consumer protection.

Under the new framework, covered platforms will be required to provide disclosures to clients, avoid misselling and misrepresentation, implement dispute resolution arrangements and safeguard client assets.

The updated framework comes at a time when Australia is working rapidly to implement a regulatory regime that can keep pace with those of other jurisdictions in the Asia-Pacific region, such as Hong Kong, Singapore, Japan and South Korea, which are all seeking to boost competitiveness and financial sector growth through digital asset innovation.

According to press reports from April 8, the South Korea Financial Supervisory Commission and the Financial Supervisory Service have implemented new rules that exchanges must follow related to delayed customer withdrawals.

The rules indicate that exchanges may only allow customers to undertake instant withdrawals in limited circumstances involving strict exemptions. Otherwise, they must delay customer withdrawals for a short period prior to allowing funds to move off their platform.

The delayed-withdrawl requirement aims to reduce the prevalence of cryptoasset-enabled fraud. In fraud schemes it is common for scammers to contact victims by phone using voice phishing techniques, instructing them to withdraw funds from their cryptoasset exchange account and send the funds to the fraudster.

By implementing a delay period before finalizing withdrawals, an exchange can potentially identify indicators of fraud that allow them to stop transactions before funds are transferred to fraudsters.

South Korea regulators have stated that their aim is for less than 1% of all domestic exchange customers to be exempt from delayed withdrawal requirements, which they believe would ensure a more robust defence against fraud.

• Hong Kong grants first stablecoin licenses: On April 10, the Hong Kong Monetary Authority (HKMA) announced that it has granted the first-ever licenses under its stablecoin issuer regulatory regime. The licenses were granted to HSBC and to Anchorpoint Financial Limited, a consortium led by Standard Chartered Bank. Under the HKMA’s framework, the licensees will be required to conduct monitoring of activity across their stablecoin networks for AML/CFT purposes.

• Japan passes legislation to classify cryptoassets as financial products: On April 10, the Japanese government approved a legislative amendment to classify cryptoassets as financial products under long-standing financial services regulation. The amendment will ensure that cryptoasset products and services are subject to robust investor protection requirements, obligating firms regulated by the Japan Financial Services Agency (JFSA) to provide disclosures to clients accessing cryptoasset products, with increased penalties for the unauthorized offer of cryptoassets.