The Blockchain Association is urging federal regulators to keep stablecoin identity checks limited to direct relationships between issuers and their customers, warning that extending the requirements to peer-to-peer transfers could "cripple the industry."

In an August 21 comment letter addressed to the Financial Crimes Enforcement Network (FinCEN), the Office of the Comptroller of the Currency (OCC), the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the National Credit Union Administration (NCUA), the crypto advocacy group responded to customer identification rules proposed by five federal financial regulators in a joint rulemaking under the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act. The GENIUS Act was signed into law in June of last year and establishes a framework for the legal issuance and use of stablecoins—dollar-pegged crypto tokens—in the United States. The letter was submitted during the public comment period for the joint rulemaking, the stage of U.S. federal rulemaking in which agencies invite outside input and must consider significant issues raised before a rule is finalized; comment letters do not bind the agencies, but they can shape the scope of the final requirements.

The comment letter, signed by CEO Summer K. Mersinger, a former CFTC commissioner, backed regulators' decision to exclude secondary transfers from Customer Identification Program (CIP) requirements while seeking clearer limits on when those requirements apply.

"The agencies are right that customer identification requirements should focus on where issuers actually have a direct relationship with customers: the primary market," the Blockchain Association wrote on X. "Consistent with the GENIUS Act, they should not extend to downstream, peer-to-peer stablecoin transactions that issuers do not intermediate, facilitate, or approve."

The proposed federal rules for implementing the GENIUS Act would require stablecoin issuers to verify the identities of direct customers under requirements similar to the Bank Secrecy Act—checks known as KYC, or "know your customer" requirements. In traditional banking, such identification requirements attach when a customer opens an account, rather than on each individual transfer between customers. The association said those checks should not extend to wallet-to-wallet transfers, one-off redemptions, technology providers, or an issuer's unrelated businesses, arguing that broader requirements could be "nearly impossible" to enforce and could "cripple the industry." Because stablecoins circulate on public blockchains, wallet-to-wallet transfers can take place without the issuer participating in the transaction.

The letter follows an amicus brief sent by the Blockchain Association last week urging the Supreme Court to review a dispute in which a federal appeals court ruled that the Federal Reserve could deny a state-chartered crypto bank access to its payment system.

The association also sought protections for issuers that rely on regulated financial institutions to perform identity checks on their behalf. An issuer that reasonably relies on another institution's Customer Identification Program should not automatically be liable if that institution fails to meet its obligations, the group argued. Existing federal rules already allow banks, under specified conditions, to rely on another regulated financial institution's customer identification program.

In addition, the association called for rules allowing issuers to use newer methods of identity verification, including digital identity tools such as zero-knowledge proofs—cryptographic techniques that allow a fact to be verified without revealing the underlying data. "In addition to clarifying certain key definitions, the final rule should avoid duplicative compliance requirements and clarify that issuers have flexibility to use modern, secure methods to collect and verify customer information, including digital identity tools and other interoperable technology," the association wrote.

The group further asked regulators to coordinate the rules with pending anti-money laundering and sanctions requirements from FinCEN and the Office of Foreign Assets Control (OFAC), arguing that staggered deadlines could force issuers to update their compliance systems repeatedly.

"The GENIUS Act created a landmark framework for payment stablecoins," the Blockchain Association said. "Implementation should preserve its goals: strong safeguards, workable rules, and room for continued innovation."

Source: Decrypt