A stablecoin does not travel in a straight line. From the moment it is minted to the moment a holder attempts to redeem it for dollars, it may pass through a sequence of wallets, custodians, and intermediary platforms, each adding a layer of distance between the original issuer and the end user. That structural reality is now at the center of one of the most consequential compliance debates in American digital finance: which participant in that chain bears the legal obligation to verify who is on the other side of the transaction? The answer, still unresolved, will define how FinCEN and federal co-regulators govern stablecoins for years to come.
At issue is a proposed Customer Identification Program, or CIP, designed specifically for permitted payment stablecoins. The proposal has entered a formal public comment period, drawing scrutiny from exchanges, wallet providers, consumer advocates, and compliance professionals who hold fundamentally different views on where identification obligations should begin and end. The debate has crystallized around a deceptively simple question: when a stablecoin moves through multiple intermediaries, must every one of them know its customer, or only the first, or only the last?
The Multi-Hop Problem
Traditional anti-money laundering, or AML, frameworks were designed around relatively linear financial relationships. A bank opens an account, verifies the account holder under Know Your Customer, or KYC, rules, and monitors activity. The chain of custody is short and the responsible party is obvious. Stablecoins disrupt that model entirely. A single unit of a dollar-pegged token can move from an issuer to a decentralized exchange, then to a self-hosted wallet, then to a custodial platform, before finally landing at a regulated exchange where someone attempts to convert it to fiat currency. Each hop is a potential gap in the identification record, and each gap is a potential vector for illicit finance.
Federal regulators are now being asked to decide whether the obligation to collect and verify customer identity should rest at the point of issuance, at the point of conversion back to dollars, at every intermediary step, or at some combination of the three. Industry participants have argued strenuously that applying full CIP requirements at every node in the chain would be operationally unworkable, effectively imposing the compliance burden of a bank on every wallet application that touches a stablecoin. Regulators, for their part, are wary that a narrow approach concentrated only at on-ramps and off-ramps would leave the middle of the chain—potentially its most active and opaque segment—without any meaningful oversight.
Exchanges and Wallets in the Crosshairs
The proposed CIP has placed exchanges and wallet providers at the focal point of the regulatory conversation, and not without reason. Exchanges represent the most visible and commercially significant touchpoints in the stablecoin ecosystem. They are already subject to broad money services business regulations and in many cases hold existing KYC infrastructure. Extending CIP obligations to them is, in principle, architecturally straightforward. The harder question involves wallet providers, particularly those offering non-custodial or self-hosted solutions where no single corporate entity controls user funds or holds user data in a conventional sense.
Critics of an expansive wallet-level KYC mandate argue that requiring identification at the wallet layer would effectively end financial privacy for legitimate users while doing little to deter sophisticated bad actors who can route around regulated infrastructure. Proponents counter that allowing unverified wallets to interact freely with regulated stablecoin systems creates a supervisory blind spot that any determined money launderer would exploit. Neither position is without merit, which is precisely why this comment period matters: the regulatory outcome is genuinely uncertain and the stakes for the industry's compliance architecture are enormous.
The Timing Dimension
Beyond the question of who must verify, the CIP debate also surfaces an equally thorny question of when. In a traditional banking relationship, identification happens before any account is opened and any transaction is processed. In stablecoin markets, the sequence is frequently inverted: a user may hold and transact with tokens for an extended period before ever approaching a regulated entity that would typically trigger a KYC obligation. Retroactive identification—attempting to verify a user only at the moment of redemption—creates evidentiary and operational challenges that the existing CIP framework was not built to handle.
Regulators must therefore consider whether a prospective identification model, applied at first contact with any regulated stablecoin service, is feasible given the pseudonymous nature of blockchain addresses, and whether such a model can be made interoperable across competing platforms without creating fragmented, inconsistent compliance outcomes.
What This Means for the Industry
The outcome of the CIP rulemaking will set a compliance baseline that shapes product design, business model viability, and market structure across the entire permitted payment stablecoin ecosystem. Firms building exchange infrastructure or wallet technology cannot afford to treat this as a distant regulatory abstraction. The comment process is the industry's most direct avenue to influence an outcome that will govern their operations. Those who engage substantively—with concrete proposals for workable identification architectures rather than blanket objections—are best positioned to shape a framework that achieves regulatory goals without dismantling the functional properties that make stablecoins commercially useful. The debate has moved squarely to exchanges and wallets. Now those entities must decide whether they lead the conversation or simply inherit its conclusions.
Written by the editorial team — independent journalism powered by Codego Press.
