Stablecoins: Navigating the Money Transmitter Minefield & Forthcoming Federal Regulatory Frameworks

Background

As digital assets gain traction across financial markets, stablecoins—cryptocurrencies pegged to fiat currencies like the U.S. dollar—are emerging as a practical medium for capital contributions, settlements, and liquidity management. For investment funds, especially those operating across borders or embracing fintech-driven infrastructure, stablecoins offer speed, transparency, and cost-efficiency. Stablecoins, a form of cryptocurrency designed to maintain a stable value, continue to be a key area of focus for governments, industry, and consumers across the country, particularly at the federal level, as lawmakers and regulators grapple with how best to balance the promise of the technology, while also ensuring that the proper consumer and financial systemic protections are in place.

Competing federal proposals, such as the GENIUS Act and the STABLE Act, are currently being debated in the U.S. Congress. Both proposals, which contain some similarities but differ in critical areas, aim to put in place clear regulatory frameworks that will govern the ways in which payment stablecoins may be issued, operate, transact and exchange in financial markets.

Overview of Current Federal Legislative Proposals

While the House’s STABLE Act (H.R. 3932) and the Senate’s GENIUS Act (S. 1582) generally track one another in terms of conceptual approach, the bills do contain nuanced differences that could impact the regulatory landscape around permitted issuance, KYC/AML, penalties for non-compliance, and domestic vs. foreign participation in stablecoin markets.

Both the GENIUS Act and the STABLE Act create a dual-track state and federal regulatory approach that is similar but not identical. Under the Senate-passed GENIUS Act, a non-bank stablecoin issuer may opt to be regulated by it’s state-level regulator rather than the federal government if the issuer’s consolidated total outstanding issuance is less than $10 billion. The most recent available version of the House’s STABLE Act does not contain a $10 billion limitation to opt for state-level regulation. Both bills mandate that banks and their subsidiaries, should they choose to issue payment stablecoins, cannot opt for state-level regulator oversight.

The GENIUS Act establishes a new Stablecoin Certification Review Committee – consisting of the Treasury Department, the Federal Reserve, and the Office of the Comptroller of Currency – that will be charged with certifying that each state’s regulatory regime meets and maintains proper standards. The STABLE Act, alternatively, affords the Treasury Department with the sole discretion in determining that the state’s regulatory regime meets federal standards.

Foreign stablecoin issuers may only issue stablecoins in the U.S. if the foreign issuer meets a strict set of requirements prescribed by the GENIUS Act, including by obtaining certification from the Treasury Department that the foreign issuer’s home jurisdiction has implemented and is enforcing a comparable supervisory regime to that of the United States. The GENIUS Act also restricts foreign issuers in jurisdictions where comprehensive economic sanctions are actively being imposed. The STABLE Act’s foreign issuer requirements, while similar, appear to be less prescriptive than those of the GENIUS Act.

GENIUS and STABLE require that payment stablecoin issuers back stablecoins with 1:1 liquid reserve assets and publish monthly reports. Both bills also prohibit issuers from deceptive market practices intended to suggest that the stablecoin is backed by the U.S. government. Additionally, both bills contain similar provisions that bar stablecoin issuers from paying interest or yields to coin holders. The GENIUS Act authorizes up to a $1 million fine and/or imprisonment of 5 years for knowing violations of the prohibition against issuing a stablecoin in violation of the Act. In contrast, the STABLE Act imposes less stringent penalties for non-compliance with the Act.

On June 17, 2025, the U.S. Senate passed the GENIUS Act by a vote of 68-30, sending the bill to the House for further consideration. The path forward for the GENIUS Act in the House is not yet clear, as Republicans in the chamber will weigh how much to change the legislation, if at all, and whether or not to package a stablecoin proposal together with digital market structure legislation, such as the CLARITY Act, which is also currently being debated in Congress. President Trump has publicly and privately stated his desire for Congress to pass stablecoin legislation by August 1, 2025.

Current Framework: When Accepting Stablecoins Becomes Money Transmission per FinCEN

As investment funds increasingly accept stablecoins as capital contributions, questions have emerged about whether this practice could trigger federal or state regulation under money transmission laws. Stablecoins, typically designed to maintain a 1:1 peg to the U.S. dollar, offer liquidity and real-time settlement. However, they also introduce risk under a complex and evolving legal landscape—especially for fund sponsors operating across multiple jurisdictions.

In March 2013, FinCEN issued its foundational guidance on the application of Bank Secrecy Act (BSA) regulations to persons administering, exchanging, or using virtual currency. This guidance laid out a tripartite classification that remains central:

• A user is a person who obtains virtual currency to purchase goods or services on their own behalf. Users are not subject to money transmitter registration.
• An exchanger is someone engaged in the business of exchanging virtual currency for real currency or other value. Exchangers are MSBs and must register with FinCEN.
• An administrator is a person who issues a virtual currency and has the authority to redeem it. Administrators are also treated as MSBs.

Fund managers that simply receive stablecoins for capital interests from investors may be considered users under this framework — provided they do not facilitate redemptions, custody other parties’ coins, or transmit value on behalf of others. Classification as a user is fact-based, but it provides the clearest basis for exemption from money transmitter registration under federal law. The line between user and exchanger can blur quickly. If a fund facilitates the conversion of stablecoins to fiat for investors, aggregates capital from multiple wallets into omnibus accounts, or acts as a transfer agent between contributors, it may inadvertently cross into exchanger territory.

In 2019, FinCEN supplemented its earlier guidance clarifying its application of BSA obligations to various business models involving convertible virtual currencies (CVCs). The 2019 update emphasized that money transmission involves both acceptance and transmission of value and merely accepting virtual currency for goods or services (e.g., an equity stake) is not transmission (under the so-called integral to sale exemption in 31 C.F.R. § 1010.100(ff)(5)(F)). However, “persons engaged in business who accept and transmit CVC, or buy or sell CVC for any reason, are money transmitters under FinCEN regulations.” Importantly, FinCEN warned against overly simplistic reliance on the 2013 user label. A party may be exempt in one context but regulated in another, depending on the business model and handling of customer funds.

Securities Law and the Covered Stablecoin Concept

On April 4, 2025, the SEC’s Division of Corporation Finance clarified in a Staff Statement on Stablecoins that certain fiat-backed stablecoins — termed Covered Stablecoins — are not securities under Section 2(a)(1) of the Securities Act or Section 3(a)(10) of the Exchange Act. These tokens must maintain a 1:1 peg and redemption for USD on demand, be backed by low-risk, readily liquid reserves whose value meets or exceeds outstanding coins, be minted and redeemed at fixed prices without limit, and may not entitle holders to interest, profits, ownership, or governance rights.

The statement also relied on Reves and Howey tests, which ruled that Covered Stablecoins are used for spending or storing value, not investment. The statement provides a fairly reliable baseline for funds to follow: use only fully backed, non-yield, non-investment-branded tokens, and they likely won’t be treated as securities.

The Patchwork of State Money Transmission Laws

The regulatory complexity increases at the state level. Forty-nine states require licensure for money transmission, but few have harmonized definitions of monetary value.

New York’s Rigorous Framework

New York is perhaps the most prescriptive. In June 2022, the New York Department of Financial Services (NYDFS) issued detailed guidance requiring that all stablecoins backed by fiat currency and issued under BitLicense or trust company authority be fully backed by segregated reserves, undergo monthly attestations and audits, allow for timely redemptions (not in excess of two business days) and be pre-approved by NYDFS. Any fund engaging with such stablecoins—even if not an issuer—may be expected to conduct diligence on the reserve attestations and redemption capabilities of the tokens they accept. Moreover, the control of digital wallets or facilitation of redemption could potentially subject a fund or its administrator to licensing review.

Texas and Others

The Texas Department of Banking takes the view that a fiat-backed stablecoin, “if intended for use as a medium of exchange,” constitutes “monetary value” under its Money Services Act. Thus, transmitting or receiving such tokens on behalf of others requires a license.

California, Wyoming, and Florida are among other states that are refining digital asset guidance, with varying levels of enforcement. In practice, a multi-state offering of fund interests for stablecoins may necessitate a patchwork compliance strategy or exemption analysis.

Impact on Compliance: Takeaways

Funds seeking to accept stablecoins as capital contributions should implement the following measures:

• Accept only covered stablecoins — those backed 1:1 by fiat and offering daily redemption at par.
• Avoid any transfer or custody function on behalf of contributors or LPs. Passive receipt is safest.
• Implement full AML and sanctions screening at the wallet level.
• Update offering documents to authorize digital asset contributions, including amendments to the LPA and subscription documents to allow for the acceptance of stablecoin contributions, addressing valuation, and including disclaimers regarding market volatility, audit risks, and redemption uncertainty.

Please contact Cozen O’Connor if you have any questions about the current rule, the proposed changes, or other compliance questions.

Co-authored by Aselle Kurmanova, a member of Cozen O’Connor’s Health Care & Life Sciences practice.

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