U.S. regulators are moving closer to defining how customer identification rules will apply to stablecoins under the GENIUS Act, but the crypto industry is pushing back against any interpretation that could extend Know Your Customer requirements to ordinary peer-to-peer transfers.
The dispute centers on a fundamental question: should a stablecoin issuer be responsible for identifying users every time its token changes hands, or should KYC obligations generally stop once the issuer has established a direct relationship with the customer?
The Blockchain Association has urged federal regulators to draw a clear line at the primary market. In comments submitted on August 21, the industry group backed the proposed customer identification framework for permitted payment stablecoin issuers, but argued that requirements should apply only when an issuer directly interacts with a customer through activities such as issuance, redemption or related services. Independent transfers between users on the secondary market should generally remain outside the issuer’s customer identification obligations, it said.
The issue emerged from a joint rule proposed in June by the Financial Crimes Enforcement Network, the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corporation and the National Credit Union Administration. The proposal implements provisions of the GENIUS Act requiring permitted payment stablecoin issuers to maintain effective customer identification programs and treating those issuers as financial institutions under the Bank Secrecy Act.
Under the proposed framework, issuers would generally need to collect and verify identifying information when establishing a customer relationship. That could include information such as a name, address and identification number, with verification performed through documentary or non-documentary methods. The regulatory challenge is determining exactly when a person becomes a customer of an issuer for purposes of those rules.
The Blockchain Association argues that simply holding or transferring a stablecoin should not automatically create such a relationship.
That distinction could have major implications for how stablecoins function in practice. Consider a user who purchases USDC or another regulated payment stablecoin from an issuer and then sends those tokens directly to another person. Requiring the issuer to perform or facilitate KYC checks on every subsequent transaction could effectively turn a blockchain token into a payment instrument subject to an identity requirement at every step.
The industry group says that would go beyond the intent of the GENIUS Act and could impose duplicated compliance obligations on transactions that the issuer does not intermediate, approve or control. It has called for clearer definitions of terms including “customer,” “account” and “digital asset service provider,” while also asking regulators to preserve flexibility around the technology used to verify identities.
Regulators, however, have a clear policy objective behind the proposed rules. Stablecoins are becoming an increasingly important part of digital payments, trading and settlement, creating concerns that they could be exploited for money laundering, sanctions evasion or other illicit financial activity. FinCEN said the proposed framework is intended to mitigate those risks while protecting the U.S. financial system and national security.
The American Bankers Association has taken a stricter position. It argued that the proposed customer-identification standards should go further and said regulators should avoid limiting compliance obligations to customers with a formal relationship, arguing that such a banking concept does not necessarily fit the stablecoin business model.
The disagreement therefore reflects a broader tension in stablecoin regulation: policymakers want crypto payments to operate within established anti-money-laundering standards, while the industry wants regulators to account for the fundamentally different architecture of blockchain networks.
That distinction is particularly important for decentralized finance. A stablecoin can move between users through a smart contract without the issuer directly participating in the transaction. Imposing issuer-level KYC requirements on those transfers could raise difficult questions about who is responsible for compliance when there is no traditional intermediary.
The outcome could also shape the competitiveness of the U.S. stablecoin market. Strict rules may provide stronger safeguards and greater institutional confidence, but overly broad requirements could increase compliance costs and make blockchain-based payments less efficient than the traditional systems they are intended to improve.
For now, the U.S. government has not finalized the customer-identification framework. The debate is part of the wider implementation of the GENIUS Act, which established the federal regulatory framework for payment stablecoins.
The key question is whether the United States can maintain effective AML and KYC controls without turning every on-chain transfer into a regulated customer interaction. The answer could define not only how stablecoins operate in America, but also whether they can fulfill their promise as fast, programmable digital payment infrastructure.