Banks Urge Regulators to Extend Stablecoin Anti-Money-Laundering Rules to Secondary Markets and DeFi
Table of Contents
You might want to know
1. Who should bear responsibility for monitoring stablecoin transactions once tokens leave issuers and enter secondary markets?
2. How can regulators design AML rules that address illicit finance risks without pushing compliant stablecoins out of decentralized finance?
Main Topic
Banking trade groups have asked U.S. regulators to clarify how anti-money-laundering (AML) rules should apply to stablecoins once those tokens move beyond the issuer and into secondary markets. In joint comment letters published recently, the Bank Policy Institute (BPI) and The Clearing House argue that current rule proposals and enforcement frameworks insufficiently address activity that occurs after issuance—activity that, they say, is where the majority of illicit finance associated with payment stablecoins takes place.
At the core of the banks’ argument is a desire for regulatory design that focuses enforcement resources on the most significant threats rather than imposing uniform, checklist-style obligations on firms regardless of their ability to control transaction flows or access transaction data. The trade groups urge regulators to adopt a "flexibility first" approach so banks and other obligated entities can prioritize high-risk activity rather than diverting resources to lower-value compliance chores.
Stablecoins are digital tokens intended to maintain a stable value relative to a reference asset, commonly a fiat currency like the U.S. dollar. Issuers have direct control over token creation and redemption and are typically responsible for managing the reserves that back the tokens. Under proposed or existing statutory frameworks, permitted payment stablecoin issuers may obtain explicit authorizations to operate in the U.S.
The letters emphasize that issuers frequently have less visibility into secondary market transactions than they do into issuance and redemption activity. As tokens circulate through exchanges, custodians, decentralized finance (DeFi) protocols, and unhosted wallets, the ability to observe counterparty information and transaction context can diminish. The trade groups contend regulators should therefore set expectations and obligations for entities operating in secondary markets—such as certain custodians, centralized exchanges, and DeFi platforms—so AML responsibilities follow the locus of control and information.
Crypto industry participants have responded by highlighting that monitoring and compliance tools already exist within some stablecoin implementations and major DeFi protocols. Proponents point to smart-contract controls, issuer-maintained master contracts that can impose freezes or blacklists, and on-chain screening performed by leading platforms. These technical controls, they argue, reduce the scope of the enforcement gap and enable meaningful AML work after issuance.
Critics of a broad, issuer-focused compliance model warn that assigning liability to stablecoin issuers for actions they cannot reasonably observe or control could force regulated tokens out of decentralized environments, eroding the benefits of DeFi and pushing activity toward less regulated venues. Some industry letters assert that the primary enforcement problem lies with offshore exchanges and unhosted wallets that operate outside international frameworks like the FATF Travel Rule, rather than with compliant DeFi infrastructure and transparent on-chain systems.
Proponents of expanded secondary-market oversight contend that clearer rules for DeFi protocols, custodians, and centralized platforms could strengthen anti-financial-crime efforts while also encouraging institutional participation. Enhanced KYC (know-your-customer) procedures, transaction controls, and monitoring expectations could foster greater trust and reduce the risks that have historically deterred banks and other institutions from engaging with digital-asset markets.
The bank trade groups also recommend that regulators prioritize proportionality in any AML regime: obligations should reflect the capabilities and roles of different actors in the stablecoin ecosystem. For example, entities that operate custody and matching services or that maintain off-ramp capabilities may have better access to identity and counterparty information and therefore could be expected to perform more vigorous screening than an issuer that only mints and redeems tokens.
Alongside calls for flexibility, the letters stress the need to address concrete gaps. Regulators are urged to identify where information bottlenecks occur and to designate responsibility to parties that both have access to relevant data and meaningful control over funds or transaction execution. The goal is to close enforcement gaps without overburdening firms that lack the technical ability to collect counterparty data or to influence post-issuance transfers.
Industry and observer commentary indicates a tension between two policy priorities: robust AML safeguards to deter illicit finance, and regulatory clarity that preserves the innovation and interoperability benefits of DeFi. Some analysts suggest that well-targeted secondary-market obligations could serve both goals by creating predictable compliance expectations that reduce systemic risk and invite regulated financial participation, thereby increasing liquidity and market depth.
At the same time, technical experts emphasize that AML monitoring can be implemented across the on-chain lifecycle of stablecoins. Many token systems incorporate administrative controls and programmatic checks that execute at the smart-contract level. On-chain analytics and suspicious-activity detection tools can flag patterns indicative of illicit behavior, enabling action even when traditional off-chain identity data is lacking. But such approaches require coordination among issuers, platforms, analytics providers, and regulators to be effective at scale.
In summary, the bank groups' submissions push for regulatory approaches that: (1) recognize the predominance of secondary-market risks for payment stablecoins; (2) allocate compliance responsibilities to entities with the appropriate visibility and control; (3) avoid mechanical, check-the-box oversight in favor of risk-based prioritization; and (4) ensure that AML rules do not inadvertently drive compliant stablecoins away from decentralized ecosystems. Achieving those objectives will require nuanced rulemaking and engagement across banking, crypto, and regulatory communities.
Key Insights Table
| Aspect | Description |
|---|---|
| Primary Concern | Regulatory gaps exist for stablecoin activity occurring on secondary markets after tokens leave issuers. |
| Recommended Approach | Adopt a risk-based, "flexibility first" AML framework that targets higher-risk actors and activities. |
| Affected Parties | DeFi platforms, certain custodians, centralized exchanges, and other secondary-market participants. |
| Technical Controls | Smart-contract freeze/blacklist mechanisms and on-chain monitoring can support AML efforts beyond issuance. |
| Enforcement Challenge | Offshore exchanges and unhosted wallets present persistent enforcement blind spots outside Travel Rule coverage. |
Afterwards...
Looking ahead, regulators will need to balance enforcement effectiveness with operational realism. Rulemakers should clearly assign responsibilities to those with access and control over transaction data and flows, while encouraging technological and procedural solutions that enable on-chain and off-chain cooperation. Continued dialogue among banks, crypto firms, analysts, and policymakers will be essential to craft AML rules that close gaps without stifling innovation. The practical outcome will likely be a hybrid model combining targeted secondary-market obligations, smarter analytics, and international cooperation to address offshore venues and unhosted wallets.
