FinCEN's stablecoin CIP proposal draws comments on secondary-market KYC requirements and redemption-triggered customer relationships. The comment period closed Aug. 21. Regulators must decide who owns the customer relationship.
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Federal regulators have to decide which intermediaries in a stablecoin's lifecycle need to know who holds the token. That question runs through the comment period on the proposed customer identification program for permitted payment stablecoin issuers under the GENIUS Act, which closed Aug. 21.
The joint proposal from FinCEN, the Federal Reserve, FDIC, OCC and NCUA would require issuers to maintain a written CIP appropriate to their size and establish procedures for identifying and verifying customers. The proposal starts from a familiar banking concept: CIP attaches when a financial institution establishes a customer relationship. Stablecoins make the perimeter harder to define because an issuer can mint a token for one customer and have no relationship with downstream holders.
The agencies proposed limiting an issuer's CIP obligation largely to primary-market relationships. Comments generally support that approach. A separate issue is what identification requirements apply when a secondary-market intermediary establishes its own customer relationship with a stablecoin holder.
The Bank Policy Institute and The Clearing House Association said regulators should explicitly state that CIP requirements apply to customer relationships established by secondary-market intermediaries. Their letter points to digital asset service providers, including exchanges and custodians, that facilitate stablecoin transactions but may operate under different identification rules. Money services businesses are subject to Bank Secrecy Act requirements but not the same formal CIP rule that applies to banks.
"Although the proposal applies exclusively to PPSIs, we urge FinCEN to ensure that the BSA's CIP rules apply equally to all secondary market actors in the digital asset ecosystem that maintain account-like relationships with their customers," the groups wrote.
America's Credit Unions approaches the same problem from the issuer side. It says imposing issuer CIP obligations on secondary-market activity can be impractical because the issuer may have little or no access to the information required to identify the holder. The group wants regulators to spell out the treatment of wallet-to-wallet transfers, custodial and non-custodial wallets, exchange-mediated transactions, third-party technology providers and smart contracts. "We seek clarity around which party is liable for compliance violations when a PPSI leverages another institution's CIP," the organization wrote.
Redemption creates a different problem. Someone who acquired a stablecoin in the secondary market can eventually interact directly with the issuer. The proposal recognizes that ownership alone does not necessarily create an account. When the holder approaches the issuer for redemption, regulators have to determine whether that transaction establishes the type of relationship that requires full CIP.
The New York Credit Union Association advocated a tiered approach. It proposes full CIP for primary-market customers and secondary-market holders that establish continuing relationships with an issuer, while allowing a more limited process for one-time or occasional direct redeemers. That process would still collect core identifying information and preserve sanctions and government-list screening.
Circle contends that requesting redemption alone should not make a secondary-market holder a customer. Under its proposal, customer status would arise when the holder completes the issuer's onboarding and identity verification process.
Those distinctions have operational consequences. A rule requiring full onboarding before redemption creates another compliance event at the end of a stablecoin's circulation, even if another institution already identified the holder.
That leads to a third issue: whether one regulated institution can rely on another's work. America's Credit Unions describes situations where a correspondent institution handles redemption after a stablecoin has changed hands multiple times. It argues the CIP function should reside with the correspondent institution rather than the issuer because the correspondent has the direct relationship with the person redeeming the stablecoin. It also wants subsidiary issuers to be able to use CIP performed by parent institutions and asks regulators to clarify who is liable when an issuer relies on another regulated institution or third party.
The reliance issue matters to banks that may issue stablecoins through subsidiaries or participate as custodians, correspondents or other intermediaries. Requiring every participant to start customer verification from scratch could produce several KYC checks around the same transaction. Allowing reliance without clear responsibility could create gaps when verification fails.
The rulemaking also gives regulators an opportunity to decide how much of the existing identification process has to depend on traditional documents. America's Credit Unions wants the rules to remain technology neutral while permitting digital identity tools and verifiable credentials. The New York Credit Union Association similarly supports government-issued mobile identification and trustworthy digital credentials as possible verification methods.
The underlying challenge remains an institutional one. A digital credential can make it easier to establish who someone is. It does not determine which institution is required to ask.
As regulators move toward a final rule, they will have to map those obligations across a stablecoin's lifecycle: issuance, secondary-market trading, custody, wallet transfers and redemption. The comments show that defining the issuer's customer is only the starting point.
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