Coin Center: Limit Stablecoin AML to On-Ramps, Not Peer Transfers

Why On-Chain Monitoring Would Fail

The first problem is practical. A stablecoin issuer has no way to collect identification from a wallet address that appears out of nowhere to receive tokens. The transaction is pseudonymous by design. To require the issuer to file a suspicious activity report on that transfer would mean either building a system that profiles anonymous addresses – a technical and legal minefield – or reporting every transfer, which defeats the purpose.

The second problem is scale. Tether and Circle are the two largest stablecoin issuers. Tether's USDT alone runs on multiple blockchains and sees millions of daily transfers. A full on-chain monitoring obligation would require processing a volume of transactions that rivals global payment networks, with no direct relationship to the parties involved.

What Coin Center Proposes Instead

The group advocates for regulators to embrace privacy-preserving technologies rather than blanket surveillance. It specifically points to zero-knowledge proofs as a tool that could enable compliance at on-ramps and off-ramps without stripping users of anonymity during regular peer-to-peer transactions.

A zero-knowledge proof lets one party prove a statement is true without revealing the underlying data. For stablecoin compliance, a user could prove they are not on a sanctions list or that their funds come from a legitimate source, without handing over their full identity to every intermediary in the transaction chain.

Coin Center argues this approach would let regulators achieve their stated goals – preventing illicit finance – without building a surveillance infrastructure into the stablecoin ecosystem itself.

The Cost-Benefit Question

The $26 billion figure for annual US AML compliance spending is not static. It grows every year. The recovery rate of less than 1% has not meaningfully improved despite decades of investment.

Coin Center is effectively asking: why replicate that model in a new industry before it has proven necessary? Stablecoins have been in wide circulation since roughly 2020. The evidence of systematic illicit finance through peer-to-peer stablecoin transfers, as distinct from exchange-based flows, is thin.

The group frames the question as a regulatory fork. One path: narrow AML obligations to issuer-customer interactions at minting and redemption. That preserves stablecoins as a peer-to-peer payment tool and keeps compliance costs proportionate to the actual customer relationship.

The other path: comprehensive on-chain monitoring. That would likely push costs so high that only well-capitalized players like Circle and Tether could afford to operate. Smaller issuers would be forced out. And the monitoring would do little to stop illicit actors who already use privacy wallets, mixers, and cross-chain bridges.

What Happens Next

FinCEN will collect comments until June 9, 2026. The final rule could land later that year or early 2027.

Stablecoin issuers, users, and investors all have a direct stake. If FinCEN adopts the narrow approach, the regulatory burden stays manageable and the peer-to-peer use case survives. If FinCEN requires on-chain monitoring, expect consolidation, higher pass-through costs for users, and a wave of litigation over privacy and surveillance.

Coin Center has drawn a clear line. The Treasury now has to decide where to draw its own.