Treasury Calls for Programmable Financial Enforcement Across Crypto

Software has long been described as law in crypto. Now, the U.S. Treasury is calling the sector out on that core element of its identity.

Under a new rulemaking and implementation proposal from the Treasury’s Financial Crimes Enforcement Network (FinCEN) and Office of Foreign Assets Control (OFAC), digital asset firms would be required to design their systems to hardwire financial enforcement capabilities into the code itself.

Stablecoin issuers, in particular, are being put on notice. The expectation is no longer that they simply respond to sanctions or suspicious activity reports after the fact. Instead, they must architect systems where compliance is built into the infrastructure itself, and enforcement is automatic, continuous and inseparable from the operation of the network.

If code is law, after all, then it follows that code should also enforce the law.

Read more: MiCA Forces Crypto Firms to Get Licensed or Get Out

When the Code Becomes the Cop

Traditional financial regulation has largely operated on a reactive model. Banks monitor transactions, flag suspicious behavior and report it to authorities. Enforcement, in most cases, happens after the fact. The proposed OFAC and FinCEN rule pushes beyond that paradigm.

The rule would classify permitted payment stablecoin issuers as financial institutions under the Bank Secrecy Act and require them to implement full anti-money laundering and counter-terrorist financing programs. But more notably, it mandates that these firms build technical systems capable of freezing, blocking and rejecting transactions that violate legal or regulatory requirements.

Compliance is no longer just a layer around financial activity. For digital assets and blockchain finance, it is becoming embedded within the asset mechanism itself at a protocol level.

Unlike most U.S. entities, stablecoin issuers would be required to maintain formal sanctions compliance programs, including risk assessments, internal controls and ongoing testing. More significantly, the rule extends liability into areas where issuers are not direct participants. If a sanctioned individual or entity uses a stablecoin in a secondary market transaction, such as by interacting with the token through a smart contract rather than the issuer itself, the issuer could still be deemed in violation of U.S. sanctions laws.

For an industry built on the premise of permissionless systems, this is a significant reorientation, one where the responsibility lies in preventing prohibited use and not merely avoiding it.

Still, regulations evolve, sanctions lists change and government enforcement priorities can shift. Software, particularly in blockchain environments, is often designed to be immutable. Bridging that gap is likely to demand new architectural approaches that can support systems that are both programmable and adaptable.

See also: Crypto Embraces Regulator-in-the-Loop Strategy as Federal Rules Roll Out

The Industry Implications of Protocol-Level Enforcement

If the rule is finalized largely as proposed, it will mark a significant milestone in the maturation of the crypto sector. Stablecoins will no longer be defined primarily by their speed or accessibility, but by their ability to operate within a tightly controlled regulatory framework.

For stablecoin issuers, the operational implications of the new rule, if enacted as written, are likely to be substantial. Compliance programs must be formalized, documented and approved at the highest levels of the organization. Dedicated officers must oversee these efforts, and ongoing training and independent testing are required.

“Some commenters acknowledged meaningful upfront costs associated with complying with the BSA, sanctions program obligations, and the GENIUS Act, particularly for new or unregulated entrants,” stated the OFAC and FinCEN proposal, referencing comments on its earlier public notice of proposed rulemaking.

The sheer cost and complexity of standing up the proposed degree of compliance may favor larger, well-capitalized firms with the resources to build sophisticated systems. Smaller or more experimental projects could find it difficult to meet these standards, potentially leading to consolidation across the crypto marketplace.

At the same time, the rule may create opportunities for a new class of service providers focused on compliance technology such as companies that specialize in blockchain analytics, risk assessment and regulatory integration.

The PYMNTS Intelligence and Citi report “Chain Reaction: Regulatory Clarity as the Catalyst for Blockchain Adoption” found that blockchain’s next leap will be shaped by regulation.

“We need to make sure that what we’ve done in our traditional world to ensure safety and soundness now comes into this space as well,”  Ryan Rugg, global head of digital assets for Citi Treasury and Trade Solutions, said during the most recent episode of the “From the Block” podcast with PYMNTS CEO Karen Webster.