FinCEN and OFAC Joint Proposed Rulemaking on PPSI AML/CFT Program and Sanctions Compliance Program Requirements

Summary

SIFMA and SIFMA AMG provided comments in response to the joint notice of proposed rulemaking (the “NPR”) ¹ published by FinCEN and OFAC with respect to implementing provisions of the Guiding and Establishing National Innovation for U.S. Stablecoins Act (the“GENIUS Act” or the “Act”) ² pertaining to anti-money laundering/countering the financing of terrorism (“AML/CFT”) program and sanctions compliance program obligations for permitted payment stablecoin issuers (“PPSIs”).

Excerpt

SIFMA supports the development of a rigorous, practical, and risk-calibrated AML/CFT and sanctions compliance framework for PPSIs that protects the integrity of the U.S. financial system, promotes responsible innovation in payment stablecoin markets, and directs compliance resources toward the customers and activities that present the greatest illicit finance and sanctions risks. SIFMA’s members expect to engage with payment stablecoins in multiple capacities, including as issuers, custodians, reserve asset managers, counterparties of PPSIs in short-term Treasury and repurchase markets, operators of institutional custody infrastructure, and providers of securities-related services in connection with stablecoin-related activities. SIFMA believes certain elements of the NPR should be clarified to ensure it is operationally workable and accounts for the distinct roles, operational capabilities, and risk profiles that PPSIs have in the payment stablecoin ecosystem.

In addition, because the U.S. legal and regulatory framework for digital assets and the underlying technology and markets are continuing to evolve, FinCEN and OFAC should commit to providing updated guidance and clarifications on a periodic basis to reflect legal, regulatory, and market changes. In particular, as legislation (under the Digital Asset Market Clarity Act (“CLARITY Act”) or otherwise) and regulation further define the structure and regulation of U.S. digital asset markets, there are likely to be opportunities to further clarify and define the roles and interactions of PPSIs, digital asset service providers (“DASPs”), and other market participants.

I. Executive Summary

This letter addresses four topics:

• Technical capabilities of PPSIs to block, freeze, and reject transactions in secondary markets: The Agencies should provide clarity on when and how PPSIs are expected to block, freeze, reject, or otherwise prevent the transfer of payment stablecoins, particularly in the secondary market where a PPSI may lack a direct relationship with the transacting parties or sufficient visibility into relevant wallet holders, or in the absence of a lawful order, sanctions nexus, or other specific trigger for action. The final rule should preserve flexibility for PPSIs to use different technologies and controls; recognize infrastructural and practical limits based on the relevant ledger, smart contract, wallet architecture, and intermediary structures; and clarify how responsibilities should be allocated where other payment stablecoin ecosystem participants, including DASPs, have greater user visibility. The Agencies should also confirm that blocking or freezing obligations apply to the relevant payment stablecoins or transaction, rather than to reserve assets. Absent such clarification, PPSIs may be subject to inconsistent or technically infeasible obligations, including where they lack sufficient visibility into transacting parties.
• Safe harbor: PPSIs should benefit from protections comparable to those available to other financial institutions when they take reasonable, good-faith actions to block, freeze, reject, delay, or otherwise restrict payment stablecoin transactions to comply with legal obligations or address suspected unlawful activity. The Department of the Treasury (“Treasury”) should work with Congress to support enactment of legislation, such as proposed Section 305 of the CLARITY Act, to ensure that safe harbor protections cover the full range of actions PPSIs may take in good faith based on reasonably available information.
• Scope of program requirements: We support the risk-based approach to AML/CFT and sanctions compliance programs in the NPR, which is consistent with FinCEN’s proposed AML program rule and should be applied consistently across financial institutions subject to AML/CFT program requirements. Our members would be concerned if the final rule’s standards for PPSI AML/CFT programs, or its application in practice, departed from this risk-based approach or otherwise imposed heightened or bespoke obligations on PPSIs. In addition, because PPSIs will be regulated financial institutions subject to AML/CFT program obligations, they should be exempt from the definition of legal entity customer under FinCEN’s customer due diligence rule.
• Travel Rule: The final rule should provide further guidance on Travel Rule obligations related to payment stablecoin activity and recognize reasonable, risk-based reliance on appropriately designed industry-developed solutions and standards as an acceptable means of compliance.