Stablecoin issuers must block sanctioned wallets in secondary markets—or face liability

Permitted payment stablecoin issuers must now actively prevent sanctioned individuals—from comprehensively restricted jurisdictions or on official watchlists—from using their tokens in secondary markets, including in peer-to-peer transfers between unhosted wallets. If they fail to do so, they risk liability for sanctions violations, even if they aren’t directly involved in the transactions. This obligation is part of a proposed rule issued on April 8, 2026, by FinCEN and OFAC under the GENIUS Act, which sets out the regulatory framework for stablecoin issuers before the full regime takes effect in January 2027. While issuers won’t be required to continuously monitor secondary market activity or file suspicious activity reports on it, they must maintain the technical ability to freeze or block funds when law enforcement issues an order. More significantly, they must proactively stop sanctioned parties from transacting at all. The rule treats partnerships between issuers and exchanges as correspondent accounts under Section 311 of the USA PATRIOT Act, subjecting them to heightened oversight. Issuers will also need to conduct risk assessments of their stablecoin’s technical design—especially smart contract functions like freezing balances—and update those assessments whenever they alter the code or expand to new blockchains. In primary markets, where issuers directly handle issuance or redemption, full transaction monitoring and SAR filings remain mandatory. But in secondary markets, where transactions occur without issuer involvement, the focus shifts from surveillance to prevention. To meet this standard, the Treasury encourages the use of blockchain analytics tools that can automatically flag and block sanctioned wallets at the protocol level. Elliptic, which analyzed the proposal, notes that these capabilities are no longer optional—they are essential for compliant operation in the US market.