Banks Advocate for Stablecoin Rules to Include Secondary Markets

Banking trade organizations, including the Bank Policy Institute and The Clearing House, are calling on U.S. regulators to clarify supervisory responsibilities for stablecoin transactions once they leave the issuer. This request comes amid concerns that broad anti-money laundering (AML) regulations may inadvertently push regulated stablecoins away from decentralized finance (DeFi) platforms.

In joint letters released recently, the two organizations assert that existing requirements do not adequately address the obligations of decentralized finance firms, custodians of digital assets, and exchanges. They emphasize that most illicit activities occur post-issuance, underscoring the need for effective oversight in secondary markets.

The bank groups assert that regulators should prioritize flexibility in compliance, allowing banks to allocate resources towards the most pressing risks rather than adhering to a "check-the-box compliance" approach. They also highlight that according to the Financial Crimes Enforcement Network and the Office of Foreign Assets Control, the bulk of illicit finance related to payment stablecoins takes place on the secondary market.

“The majority of illicit finance involving payment stablecoins occurs on the secondary market,” the Bank Policy Institute emphasizes. The added complexity of secondary market transactions, where issuers may lack visibility, complicates regulatory compliance and oversight.

Stablecoins are cryptocurrencies designed to maintain a stable value, typically pegged to fiat currencies like the U.S. dollar. Issuers manage their creation, redemption, and the reserves that back them. Under the GENIUS Act, qualified issuers are authorized to issue payment stablecoins within the U.S., but the recent push from banking groups indicates that regulations need to keep up with evolving market dynamics.

As the regulatory landscape develops, it remains to be seen how this will impact the interaction between stablecoins and DeFi platforms, and whether regulators will adopt the proposed measures outlined by banking advocates.