GENIUS Act: AML/CFT And Sanctions Compliance

State of play

• Today Congress passed the Guiding and Establishing National Innovation for U.S. StablecoinsAct (GENIUSAct) (available here) with strong bipartisan support.
• The bill previously passed the Senate, and so it now heads to the president's desk to be signed into law, which President Trump has stated he intends to do quickly.
• In this update we describe the key components of the anti-money laundering and countering the financing of terrorism (AML/CFT) and sanctions compliance requirements under the GENIUSAct.An important insight and key theme is that many of theAML/CFT and sanctions compliance expectations are not set out in the legislation, and will instead need to be determined through implementing regulations.
• Acompanion update provides a broader overview of the key components of the GENIUSAct, along with charts detailing the various regulations and reports required by theAct (available here).

Key definitions

• The GENIUSAct's definition of the Bank SecrecyAct (BSA) aligns with the standard scope of laws that comprise the BSA,including:
  • Section 21 of the Federal Deposit InsuranceAct (12 U.S.C. 1829b);
  • Chapter 2 of title I of Public Law 91– 8 508 (12 U.S.C. 1951 et seq.); and
  • Subchapter II of chapter 53 of title 31, United States Code (53 U.S.C. 5311 et seq.).
• Compliance under the BSAwould necessarily include complying with the BSA's implementing regulations, which generally apply to the following "financial institutions," as defined in 31 CFR 1010.100(t):
  • Banks; ▪ Broker dealers;
  • Money services business (including money transmitters, check cashers, providers of prepaid access and foreign exchange dealers;
  • Futures commission merchants;
  • Introducing brokers; and
  • Mutual funds.
• As discussed on the following slides, the GENIUSAct provides that "a permitted payment stablecoin issuer shall be treated as a financial institution for purposes of the Bank SecrecyAct."
• The GENIUSAct defines a "lawful order" as:
  • any final and valid writ, process, order, rule, decree, command, or other requirement issued or promulgated under Federal law:
    • Issued by a court of competent jurisdiction or by an authorized Federal agency pursuant to its statutory authority, that:
      • requires a person to seize, freeze, burn, or prevent the transfer of payment stablecoins issued by the person;
      • specifies the payment stablecoins or accounts subject to blocking with reasonable particularity; and
      • is subject to judicial or administrative review or appeal as provided by law.
• Lawful orders would likely include, but may be broader than, Office of ForeignAssets Control (OFAC) sanctions prohibitions.

AML/CFT and sanctions regulatory framework

• Underthe GENIUSAct, permitted payment stablecoin issuerswill be "treated" as financial institutions underthe BSA.
  • The GENIUSAct does not amend the BSAand thus theAML/CFTcompliance framework is not self-executing, as the BSA and its implementing regulations only apply to "financial institutions," as defined in 31 U.S.C. 5312 and 31 CFR 1010.100(t).
  • The GENIUSAct implies that"treatment" underthe BSAis a triggerfor the application of U.S. economic sanctions, which is likely an effort to explicitly establish that payment stablecoin issuersare subjectto U.S. economic sanctions. However, this is unnecessary because under existing law, U.S. economic sanctions apply to all U.S. persons and all activity withinU.S. jurisdiction,regardless of the applicability of the BSAand its implementing regulations.
• The Treasury Secretary is required to issue implementing regulations underthe GENIUSAct, which would presumably be issued by the Financial Crimes Enforcement Network (FinCEN), to which Treasuryhas delegated the authority to administer the BSA.
  • FinCEN has authority to define a businessas a "financial institution" underthe BSAand its implementing regulations if the businessengages in any activity determined by regulation "to be an activity which is similar to, related to, or a substitute for any activity" in which a "financial institution" is authorized to engage. Presumably such implementing regulations will determine that permitted payment stablecoin issuersare "financial institutions" underthe BSA.
  • The BSAalso explicitly authorizesTreasury—and therebyFinCEN—to "prescribe minimum standards"forAML/CFT programs.
  • Similarly, underthe BSA, Treasury,and thus FinCEN, is authorized to requireSAR filings.
• A payment stablecoin issuer's AML/CFT and sanctions regulatory framework will be administered by its primary regulator (i.e., a federal stablecoin regulator in the case of federally licensed issuers, and a state stablecoin regulator in the case of state-licensed issuers).
• The primary federal and state payment stablecoin regulators are required to issue implementing regulations that establish BSAand sanctions compliance standards that:
  • Are tailored to the business model and risk profile of permitted payment stablecoin issuers; and
  • Are consistent with applicablelaw.
• The federal and state regulators'standards will presumably address secondary market transfers of stablecoins.
• It is unclear whether the GENIUS Act envisions the federal banking agencies and state regulators to establish separateAMLcompliance requirements for permitted payment stablecoin issuers or simply "BSAand sanctions compliance standards," which areundefined.
• For context, as required under the Federal Deposit InsuranceAct, the federal banking agencies concurrently maintain AML/CFT compliance requirements that largely mirror those maintained by the FinCEN and often issue separate compliance guidance to regulatedentities.
• While the Stablecoin Certification Review Committee is required to certify that a state's regulatory framework (including for AML/CFT and sanctions compliance) is "substantially similar" to the federal regime, in theory, administrationand regulatory expectations could differ at the federal vs. state levels.

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