Fed proposes mandatory ID checks for US stablecoin users

The US Federal Reserve (Fed) has released a draft regulation that would require cryptocurrency firms operating in the country to verify the identities of stablecoin users. The proposed rule aims to clarify how anti-money laundering and know-your-customer (KYC) requirements should be applied to stablecoin services in order to curb illicit finance risks.

Verification requirements for stablecoin firms

The draft regulation, co-developed with the Treasury Department and the Federal Deposit Insurance Corporation (FDIC) under the Trump administration, interprets how the identity verification sections of the GENIUS Act, effective since last summer, should be enforced. The GENIUS Act established a legal framework for issuing stablecoins pegged to the US dollar.

According to the draft, any individual or entity deemed a “digital asset service provider” must comply with the new rules. This category covers US-based individuals and legal entities that offer crypto asset trading, transfer, or custody services. Under the regulations, companies must implement extra precautions to stop stablecoin-related services from being exploited by criminal organizations or illicit actors.

The rules would require service providers to confirm customer name, birth date, and address details. In addition, these details would need to be cross-checked with US government records listing terrorist groups and blacklisted organizations.

Notable abstention in board vote

Most Fed board members expressed support for the proposed regulation. According to information in the draft, former Fed Chair Jerome Powell was among those who approved the proposal. Current Fed Chair Kevin Warsh, however, abstained from the vote.

Warsh did not provide a reason for his abstention, and a Fed spokesperson did not immediately respond to requests for comment. This development has led to increased speculation about potential points of contention within the institution regarding the proposal.

Debate over exemption for decentralized protocols

The draft’s exemption for decentralized protocols sparked criticism among some officials. This exception, included in both the proposal and the GENIUS Act, means decentralized platforms would not be subject to the new verification requirements.

Michael Barr, a regular contributor to financial regulation issues within the Fed’s board, backed the publication of the proposal yet cautioned that current regulations might inadequately address illicit finance risks, particularly those emerging from secondary market dealings of payment stablecoins.

Sixty-day public comment period begins

The Fed’s proposed regulation now enters a 60-day public comment phase. Throughout this period, industry representatives, legal experts, companies, and other stakeholders will be able to submit feedback to the institution. Whether any changes will be made to the final version depends on the responses received during this consultation.

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