The US Federal Reserve (Fed) has published a new draft regulation that would require cryptocurrency firms operating in the US to verify the identities of stablecoin users. This proposal aims to implement customer verification rules to curb money laundering and illegal financing risks within stablecoin services.
Mandatory identity checks for stablecoin firms
The draft regulation was drawn up in coordination with institutions under the Trump administration, including the Treasury Department and the FDIC. It interprets how customer identification Provisions within the GENIUS Act, which came into force last summer, should be applied. The act established a legal framework for issuing stablecoins pegged to the US dollar.
Under the proposal, any individual or entity considered a “digital asset service provider” will be required to take specific measures. This includes US-based individuals and companies offering cryptocurrency trading, transfer, or custody services. Firms are expected to introduce additional controls to prevent stablecoin-related services from being used by criminal organizations or illicit groups.
According to the Fed’s proposal, digital asset service providers will be responsible for verifying customers’ names, birth dates, and address information, and checking this data against the US government’s terrorism and sanctions lists.
In line with these rules, customer names, dates of birth, and addresses will need to be verified. Moreover, providers will be required to cross-reference this information with records of terrorist groups and blacklisted entities maintained by the US government.
Notable abstention in the board vote
A majority of Fed board members supported the proposed regulation. The draft states that former Fed Chair Jerome Powell gave his approval. However, current Fed Chair Kevin Warsh abstained from the vote.
Warsh did not provide any explanation for his abstention, and a Fed spokesperson did not immediately respond to a request for comment. This has fueled speculation about which aspects of the proposal spurred debate within the institution.
Decentralized protocols carve-out sparks controversy
The draft’s exemption for decentralized protocols drew criticism from some officials. This exemption appears both in the proposed regulation and within the GENIUS Act framework.
Fed Board Member Michael Barr voiced his support for the proposal but stressed that the regulatory framework under the GENIUS Act remains insufficient in addressing illegal financing risks tied to secondary market transactions of payment-focused stablecoins.
Michael Barr stated that while he backed the release of the proposal, he believes the current framework may fall short in covering illicit finance risks that might emerge specifically in secondary market transactions. Barr is a frequent commentator on financial regulation issues within the Fed’s board.
Sixty-day public comment period begins
The Fed’s proposed regulation now enters a 60-day public consultation phase. During this window, industry representatives, legal experts, companies, and other stakeholders will have an opportunity to submit their assessments to the central bank. Any potential changes to the final text will be determined after this period.
