The Ministry of Finance is reclassifying stablecoin conversions as correspondent banking transactions
Reports indicate that the US Treasury Department is conducting due diligence on bank-level partners for stablecoin issuers, coinciding with the UK's ban on such activities by its financial institutions.
11/14/20264 min read
Reclassification is the whole issue.
A joint proposal by FinCEN and OFAC, issued earlier this year, outlined what issuers of payment stablecoins would be required to do when the GENIUS Act regime fully takes effect from January 2027. A key step in this proposal is to treat issuers' relationships with partners, customers, and trading parties, particularly including issuance and redemption agreements with cryptocurrency exchanges, as agent accounts.
That single classification accomplished more than any list of requirements. A correspondent bank carries a comprehensive and rigorous system of obligations built over decades, including enhanced due diligence on the institution being sponsored, understanding of that institution's own customer base, and the ability to withstand special measures under Section 311 of the USA PATRIOT Act. An issuer with relationships to exchanges that are correspondent accounts would inherit all of that without the Treasury Department having to draft a separate version specifically for cryptocurrencies.
This also means that the issuer must understand who its trading partners are serving, not just who the exchange is. This is the same underlying obligation of thorough due diligence that has driven risk reduction in correspondent banking in traditional finance for the past twenty years, as banks have withdrawn entirely from jurisdictions rather than bearing the burden of due diligence. Now, the same dynamic applies to who the issuer will issue money to.
Terms not included in this notice
This proposal is more practical than the wording in the title in one important respect. Issuers would not have to monitor secondary market activity for anti-money laundering purposes or file suspicious activity reports, based on FinCEN's reasoning that they often cannot assess whether much of that activity is suspicious.
That's a reasonable concession. The issuer only sees the money transfers between addresses without context about the parties involved, and requiring reporting of suspicious activity would create more information overload than intelligence. Instead, these obligations arise when the issuer has a relationship, that is, at the time of issuance and redemption, and when the issuer has the power, that is, to freeze the funds.
Regarding freezing, the proposal requires issuers to have the technical capability to freeze, block, or reject funds under legal order, and to prevent sanctioned individuals and parties in sanctioned jurisdictions from using their smart contracts, including peer-to-peer transactions involving non-custodial wallets. This document examines the use of blockchain analytics and contract programming to block wallets associated with sanctioned parties.
The final clause is the most stringent. Blocking peer-to-peer transfers involving non-custodial wallets means ongoing, contractual-level screening based on a changing list. This transforms the capability that Tether and Circle have exercised on a case-by-case basis into a permanent compliance obligation with a clearly stated expectation.
The convergence between cooperatives and Iran
In May, the UK designated the Cooperative as a trustee for trading due to alleged links to a Russian financial network, with reports suggesting trading flows totaled around $1.5 billion, and subsequently major exchanges tightened controls on transfers to the Cooperative. The ban on UK institutions holding trading accounts with a designated exchange is a common consequence of such designation, and what is noteworthy here is that it applies correspondent banking terminology to a cryptocurrency exchange at the same time the Treasury applied it to stablecoin issuance.
That's a noteworthy convergence. Two independent jurisdictions concluded that the relationship between a cryptocurrency institution and the broader financial system is an agency relationship, in all its implications. This addresses a question the industry has wanted to leave open: whether cryptocurrency intermediaries should be regulated as a new category or incorporated into an existing one. The answer is that they should be included as an existing category.
The expansion into Iran completes the picture by further clarifying the industry's influence. An issuer whose contracts are used by a sanctioned party in a sanctioned jurisdiction now faces a direct problem, precisely the accusation in the Senate report earlier this year that described USDT as Iran's financial lifeline.
Assessment and Conclusion
For Tether, this is the most stringent set of obligations they have ever faced in the US market, with OCC regulations taking effect on January 18th and their own application position still unresolved. They have already rejected MiCA in Europe. Rejecting the US legal regime is another issue.
For Circle, built on legal compliance, the burden of compliance is real, and the competitive effect is advantageous, as the rigorous due diligence of transaction partners is a fixed cost that provides economies of scale and existing banking relationships.
For everyone else, the practical conclusion is that the question of which exchange an issuer will issue to becomes a compliance decision with federal consequences. Risk mitigation then falls on exchanges in jurisdictions with higher due diligence costs rather than on exchanges that do something wrong. That's how correspondent banking works, and the rules that apply are the same rules.
Disclaimer: The content in this article is for informational, research, data analysis, and reference purposes only regarding the cryptocurrency market. All opinions, assessments, forecasts, or opinions reflect the author's perspective at the time of publication and do not constitute investment advice, solicitations for buying or selling, trading recommendations, advertising, marketing, or promotion of any financial products, services, or cryptocurrencies. Mentions of projects, tokens, protocols, exchanges, wallets, or cryptocurrency service providers (CASPs) are for research, analysis, or informational purposes only and should not be construed as endorsements, recommendations, or guarantees in any way. HCCVenture does not broker, advertise, market, promote, or connect users in Vietnam with any cryptocurrency services from CASPs. HCCVenture does not accept asset custody, investment mandates, manage assets, or execute transactions on behalf of clients. All investment decisions are made entirely through the reader's own research (DYOR), evaluation, and responsibility; HCCVenture is not liable for any losses or damages arising from the use of or reliance on the information presented in this article.
Compiled and analyzed by HCCVenture
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