The US Federal Reserve (FED) has released a draft regulation that would require crypto companies operating in the US to verify the identities of stablecoin users. The proposal outlines how “know your customer” (KYC) rules should be applied to stablecoin platforms, aiming to limit the risks of money laundering and illicit financing.
Identity compliance for stablecoin providers
The draft regulation was prepared in coordination with agencies such as the Treasury Department and the Federal Deposit Insurance Corporation (FDIC), both of which were active during Donald Trump’s administration. It interprets how identity verification obligations, introduced through the GENIUS Act last summer, should be implemented. This law had previously established a legal framework for issuing stablecoins pegged to the US dollar.
According to the draft, anyone or any organization considered a “digital asset service provider” will be required to adopt specific measures. This affects US-based individuals and corporate entities that offer crypto trading, transfers, or custody services. These companies are now expected to implement additional controls to prevent stablecoin-related services from being exploited by criminal structures or illegal groups.
Under the FED’s proposal, digital asset service providers must verify customer names, birth dates, and address information. Additionally, these details will be checked against US government terrorism and sanctions lists.
According to these standards, customer names, dates of birth, and addresses must all be verified. Furthermore, this information will have to be cross-checked with databases related to terrorist watchlists and banned entities maintained by US authorities.
Notable abstention in board vote
The majority of FED board members expressed support for moving forward with the proposal. The draft notes that former FED Chair Jerome Powell was among those who approved the regulation. In contrast, the current FED Chair, Kevin Warsh, abstained during the vote.
Warsh did not provide any explanation for his abstention. A FED spokesperson also declined to comment on the matter immediately, raising questions about what aspects of the proposal may be causing internal debate at the institution.
Exemption for decentralized protocols sparks debate
The draft excludes decentralized protocols from these identity verification requirements—a provision that has drawn criticism from some officials. Both the regulation and the GENIUS Act set out this notable exception.
FED Board Member Michael Barr stated his support for the proposal’s release but emphasized that current regulatory frameworks remain inadequate when it comes to the illicit finance risks stemming from secondary market transactions involving payment stablecoins.
Michael Barr, a frequent contributor on financial regulation issues within the FED board, said he supports the release of the proposal but warned that the current framework may still fall short in addressing illegal financing risks, especially those arising in secondary market transactions.
Sixty-day public feedback window begins
The FED’s proposal will now enter a 60-day public consultation period. During this phase, industry representatives, legal experts, companies, and other stakeholders can submit their views and evaluations to the institution. Whether any changes will be made to the final text remains to be seen after this period concludes.
