Stablecoin Issuers Get Hall Monitor Duties in Treasury's New 'Block, Freeze, Reject' Proposal

The U.S. Treasury is about to drop a hefty to-do list on stablecoin firms, and it's not for the faint of heart. According to rules poised for proposal and reviewed by CoinDesk, issuers of stablecoins in the U.S. would have a fresh array of duties to keep criminals at bay and keep government watchdogs informed about malicious actors. Basically, the people who brought you "it's pegged to the dollar, trust me bro" are now being asked to also play unpaid intern for FinCEN.

A joint proposal from the Treasury's Financial Crimes Enforcement Network (FinCEN) and Office of Foreign Assets Control (OFAC) will lay out the deep controls stablecoin businesses must put in place, including the ability to "block, freeze and reject" transactions and internal protections to comply with the Bank Secrecy Act. The agencies are essentially handing stablecoin issuers a digital truncheon and telling them to keep the neighborhood safe—or else.

This marks one of the most significant moves yet to implement last year's Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act — the first major crypto-sector law for the U.S. The two Treasury arms that police illicit finance are crafting a tailored approach for stablecoin firms, with a public comment period and potential revisions before finalization. It's the GENIUS Act actually doing something genius: making sure your USDT isn't funding questionable karaoke bars in Pyongyang.

But the agencies are also sending a message of deference to the industry, suggesting companies understand their own hazards best. A summary of the joint proposal reviewed by CoinDesk said it's focused on effectiveness "and that financial institutions are best positioned to identify and evaluate their money laundering, terrorist financing and illicit finance risks." Translation: we're the cops, but you're the informants. Good luck, and try not to snitch on yourselves too hard.

The department contends that a firm running appropriate money-laundering preventions is generally safe from enforcement actions unless it's showing "a significant or systemic failure to maintain that program." So basically, mess up once and you're fine. Mess up like it's your job and that's when men in suits with calculators show up at your door.

On the money-laundering front, FinCEN would expect stablecoin issuers' programs to halt specifically flagged transactions and know where to devote "more attention and resources toward higher-risk customers and activities." When U.S. authorities pursue a specific target, regulated issuers would have to scour their own records for any activity tied to individuals or entities flagged by FinCEN. Issuers would also be expected to act as allies in the agency's pursuit of entities identified as "primary money laundering concerns." Think of it as community service, but for finance.

As recently as 2023, the agency had sought to tag crypto mixers such as Tornado Cash under that label, though earlier this year, the Treasury reversed course to suggest mixers could serve legitimate and legal privacy uses. The regulatory winds are shifting faster than a degen's portfolio after a tweet from Elon. One day mixers are financial supervillains, the next they're just misunderstood privacy enthusiasts. Pick a lane, folks.

On the sanctions front, OFAC would require stablecoin issuers run risk-based safeguards for stablecoin activity on primary or secondary markets, with policies to spot and reject transactions "that may violate or would violate U.S. sanctions." Because nothing says "innovative financial technology" quite like your stablecoin app having the same blocked list as a 1980s embargo on Soviet caviar.

Sanction missteps — including past flagrant violations — have been a critical concern of crypto industry detractors, including recent scrutiny focused on the world's biggest exchange, Binance. Treasury Secretary Scott Bessent said in a statement that the latest efforts "will protect the U.S. financial system from national security threats without hindering American companies' ability to forge ahead in the payment stablecoin ecosystem." Translation: we're coming for you, but gently, and only because we love you. Probably.

The crypto industry and its stablecoin leaders — including Tether, Circle, Ripple and the firm partially owned and controlled by the family of President Donald Trump, World Liberty Financial — have been awaiting regulation that helps further establish their bespoke assets as safe and reliable. The waiting is the hardest part. Well, that and explaining to your grandma why her savings account can't just be transferred to a crypto wallet named after a cartoon frog.

Some tensions remain in the wider crypto community, which has had a tumultuous relationship with governments since its beginnings, when its founding principles aimed to keep cryptocurrencies outside of government control. The decentralized finance (DeFi) sector remains a space that seeks to cut away intermediaries and maintain direct interactions, but the illicit-finance controls for that arena are still unresolved in ongoing negotiations among the industry, securities sector and lawmakers over the Digital Asset Market Clarity Act in the U.S. Senate. It's the ultimate irony: crypto was supposed to kill the middleman, and now everyone's arguing about who gets to be the middleman.

Earlier this year, a third arm of the Treasury — the independent Office of the Comptroller of the Currency that regulates national banks and trusts — proposed its standards and procedures for issuers it'll watch as the primary federal regulator. This week, its sister regulator, the Federal Deposit Insurance Corp. did the same with a largely parallel proposal. The regulatory alphabet soup thickens. At this point, crypto companies need a flow chart just to figure out which agency gets to yell at them first.

The GENIUS Act is meant to go into full effect by 2027. Well before that, firms have been pursuing charters and partnerships to get involved in stablecoins. The Trump-tied World Liberty applied for a charter as a trust bank in January and manages the USD1 stablecoin. The company is under fresh scrutiny this week after reportedly being unaware that its AB DAO partner was involved in a project with potential ties to Cambodia's Prince Group, the target of major U.S. investigations, sanctioning and the seizure last year of a record $14 billion in bitcoin. Those types of business relationships at stablecoin issuers would be under stringent new industry-managed controls in the Treasury Department's pending proposal. Nothing says "due diligence" quite like accidentally partnering with a group that makes the $14 billion bitcoin seizure look like a warm-up act. Welcome to the stablecoin game, where the stakes are high and the background checks are apparently optional.