Keeping Crypto Clean: Risk-Based Controls for Stablecoins
June 24, 2025 – By Alexander C. Drylewski, Alessio D. Evangelista, and Adam J. Cohen
As cryptocurrencies continue to grow in mainstream financial markets, regulatory attention has increasingly turned towards stablecoins — digital assets designed to maintain a stable value by being pegged to traditional fiat currencies like the U.S. dollar. After various discussions and legislative attempts, the U.S. Congress is now on the verge of enacting comprehensive regulatory frameworks aimed at bringing stablecoins under clearer federal oversight.
The Emerging Regulatory Landscape for Stablecoins
Stablecoins have carved out unique functions within the digital asset ecosystem. Primarily, they act as a store of value, a medium of exchange for digital asset traders and lenders, and a key on- and off-ramp into the broader crypto economy. Yet proponents of these assets envision an expanded role for stablecoins, including their use in everyday payments and cross-border transactions — areas closely watched by regulators.
Two key legislative proposals are advancing rapidly: the Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act and the Stablecoin Transparency and Accountability for a Better Ledger Economy (STABLE) Act. Each bill aims to embed stablecoins into the existing U.S. anti-money laundering (AML) and combating the financing of terrorism (CFT) regulatory environment, primarily by integrating stablecoin activities under the Bank Secrecy Act (BSA).
Financial institutions and firms involved in stablecoin issuance, administration, or exchange should carefully evaluate whether their current AML/CFT programs meet the BSA’s stringent and detailed requirements. These programs must be tailored to fit the unique business models and risk profiles associated with stablecoin activities.
Understanding the Risks Associated with Stablecoins
Stablecoins share many illicit finance risks common to digital assets — including issues tied to anonymity, pseudonymity, challenges in decentralized finance (DeFi), and operational complexities such as managing gas fees in permissionless blockchain systems. However, a distinctive risk relates to the transparency of reserves backing stablecoins. Without proper disclosure, it becomes difficult to verify if stablecoins are truly backed as claimed, opening avenues for fraud or the laundering of illicit funds through inadequately backed tokens.
This heightened scrutiny reflects the critical need for firms to strengthen compliance frameworks amidst growing governmental focus.
Key AML/CFT Program Components for Stablecoin Transactions
The U.S. BSA requires covered financial institutions to implement comprehensive AML/CFT programs with several core elements. Some of these requirements have unique implications when applied to stablecoins:
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Customer Identification Program (CIP) and Customer Due Diligence (CDD): Financial institutions must verify the true identities of customers under the CIP rules and understand the nature and purpose of customer relationships under CDD obligations. For stablecoin dealings, adapting or developing CIP and CDD processes is essential to ensure that institutions comprehend who their counterparties are. This is vital not only for direct dealings but also when custody or settlement services involving stablecoins are provided. Institutions that currently fall outside CIP requirements, such as some stablecoin issuers, need to prepare for potential future obligations.
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Transaction Monitoring: Financial institutions are obligated to report suspicious activities, including large cash transactions and potentially illicit transfers. Given the transparent yet complex nature of blockchain transactions, leveraging blockchain analytics becomes a critical tool. Analytics help detect suspicious patterns by analyzing on-chain transaction history, volumes, counterparty behavior, and other factors. Many vendors now offer specialized blockchain monitoring software that integrates alerts and investigative capabilities directly into compliance workflows.
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Travel Rule Compliance: Although not fully detailed here, compliance with the "travel rule"—which requires transmitting specific transaction information between financial institutions—is increasingly relevant for crypto assets, including stablecoins, as regulators seek alignment with traditional financial oversight standards.
Practical Steps for Firms Handling Stablecoins
Institutions engaged in stablecoin activities should:
- Conduct thorough risk assessments to understand specific AML/CFT risks associated with their stablecoin products.
- Implement or enhance CIP and CDD programs tailored to stablecoin counterparties.
- Invest in advanced blockchain analytics technologies to improve transaction monitoring and suspicious activity detection.
- Stay updated on regulatory developments regarding stablecoin legislation, including the GENIUS and STABLE Acts, to ensure proactive compliance readiness.
- Apply risk-based due diligence to third-party stablecoin issuers and service providers to align with regulatory expectations.
Conclusion
Stablecoins represent an evolving intersection between digital innovation and traditional finance, carrying inherent risks but also offering significant promise. Through robust, risk-based AML and CFT controls, supported by legislative clarity and technological tools, the financial industry can harness the benefits of stablecoins while mitigating risks of illicit finance.
As Congress moves forward with defining a clear regulatory framework, the responsibility lies with financial institutions, stablecoin issuers, and service providers to ensure that their compliance programs are not only comprehensive but adaptable to this rapidly transforming digital asset landscape.
This article is based on an analysis provided by attorneys from Skadden Arps Slate Meagher & Flom LLP and is published exclusively via Reuters commentary.