Wolfsberg Group issues new guidance on banking services for stablecoin issuers - Trade Treasury Payments

The Wolfsberg Group, a global association of twelve banks committed to combating financial crime by developing frameworks and practical financial industry standards for financial institutions, released comprehensive guidance on the Provision of Banking Services to Fiat-backed Stablecoin Issuers on 8 September. This guidance comes at a critical time as stablecoin usage becomes more widespread globally.

Stablecoins are cryptocurrencies that maintain a stable value relative to their pegged fiat currencies, such as the US dollar or the Euro, through direct backing reserves. Unlike volatile cryptocurrencies such as Bitcoin, stablecoins such as USD Coin (USDC) and Tether (USDT) maintain a consistent 1:1 value with their underlying assets. They connect traditional finance with blockchain technology, and also offer price stability. The adoption of fiat-backed stablecoins has accelerated in recent years, with total transaction value exceeding $42.3 trillion for the last twelve months. As a result, financial institutions (FIs) face pressure to service this growing market while trying to mitigate the associated risks.

The Wolfsberg Group guidance acknowledges that stablecoins’ advantages are like a double-edged sword. Stablecoins offer price stability, global accessibility, pseudonymity, and fast settlement, making them appealing for legitimate businesses. However, these same features can also lead to illicit activities as they provide access to major currencies without relying on traditional payment systems, especially in sanctioned jurisdictions. This requires FIs to determine appropriate boundaries for oversight and monitoring.

Framework for managing stablecoin issuer relationships

As with any relationship where a financial institution provides services to another financial institution, a general understanding of the issuer’s financial crime risk management framework is required to establish the relationship. The Wolfsberg guidance provides a structured framework for FIs to manage relationships with fiat-backed stablecoin issuers operating in regulated jurisdictions. 

The Group has issued the Financial Crime Compliance Questionnaire (FCCQ) and the more extensive Correspondent Banking Due Diligence Questionnaire (CBDDQ) to support the assessment of any FI’s financial crime risk management framework. These questionnaires serve as the starting point for stablecoin issuers. 

They help FIs thoroughly assess an issuer’s governance structure, risk appetite, compliance staffing, customer due diligence practices, transaction monitoring capabilities, and sanctions screening protocols. The questionnaires shed light on whether the stablecoin issuer has implemented adequate systems for detecting suspicious activities. The guidance also includes additional questions and themes specific to stablecoin issuers, complementing the categories captured in the FCCQ and CBDDQ. They help financial institutions evaluate how effectively a stablecoin issuer manages risks inherent to blockchain-based financial products.

Beyond this, FIs should understand the intended purpose of each account, including operating accounts, reserve accounts, and settlement accounts for transactions related to the issuer’s clients, associated products, the expected fund flows, and the types of counterparties with which the issuer will interact. 

Financial institutions should distinguish between the issuer’s direct clients, such as Digital Asset Service Providers (DASPs), corporates, or non-bank payment service providers, and the users who may ultimately receive stablecoins through those intermediaries.

The financial crime risk management framework

The Wolfsberg Guidance outlines key principles for improving financial crime controls related to stablecoins. FIs must evaluate the regulations where issuers operate and assess the strength of their anti-money laundering (AML), counter-financing of terrorism (CFT), and sanctions practices.  

Institutions should also review the issuer’s due diligence on distribution partners and blockchain platforms. They must use blockchain analytics for transaction monitoring and be able to freeze assets linked to sanctions violations. Additionally, institutions need to determine how issuers screen transactions, respond to law enforcement, and ensure transparency.

FIs are advised to assess factors including the issuer’s regulatory status, the technological infrastructure supporting the stablecoin, governance mechanisms, and the issuer’s own compliance frameworks. This evaluation should cover the depth and breadth of the FI’s blockchain monitoring implementation.

The guidance also stresses that FIs must assess the issuer’s training and education strategy to ensure that all staff understand and accept their roles in managing financial crime risk.

Risk-based approach to on-chain monitoring of Stablecoin transactions 

The Wolfsberg guidance describes the level to which a FI, in following a risk-based approach, may monitor the compliance obligations of the issuer on the blockchain. Rather than tracking stablecoin transactions to arbitrary degrees (“one hop, two hops”), institutions should focus on whether issuers operate within their stated risk appetite. This is a novel dimension of oversight not typically encountered with traditional financial service providers.

For lower-risk scenarios, such as when an issuer permits a major bank or multinational to engage directly in minting/burning for internal purposes, minimal on-chain monitoring may be sufficient. However, for higher-risk situations like an issuer providing services to smaller DASPs in unregulated jurisdictions, may need more stringent monitoring, including transparency into underlying wallet addresses to enable tailored analytics. FIs can establish an on-chain account activity review (AAR) complementing traditional banking assessments. 

The guidance recognises that while blockchain technology offers better transaction traceability, it creates both opportunities and challenges for compliance. As a result, FIs need to decide clear boundaries for monitoring blockchain activities while ensuring they align with their overall risk management strategies.

The way forward is financial innovation with risk mitigation

The Wolfsberg Group guidance focuses on supporting financial innovation while ensuring strong financial crime controls.

It states that FIs engaging with stablecoin issuers will need to develop specialised expertise, including blockchain analytics capabilities and enhanced due diligence processes. They will also need to reassess their approach to servicing this market regularly. The Wolfsberg Group guidance provides a foundation for these assessments. 

However, institutions will need to remain cautious as the stablecoin space continues to evolve. Its guidance would also help normalise banking relationships with properly regulated stablecoin issuers, facilitating greater integration between traditional finance and digital asset markets.

Access the complete guidance here.