South Korea's banking industry has asked U.S. regulators to clearly extend anti-money laundering (AML) regulation related to stablecoins beyond the issuance stage to secondary market trading. The cryptocurrency industry has objected, saying excessive regulation could shrink the decentralised finance (DeFi) ecosystem, adding to a growing debate over the scope of stablecoin oversight.

Blockchain outlet Decrypt reported on June 11 that the Bank Policy Institute (BPI) and The Clearing House (TCH), in a joint comment letter, argued that the oversight framework for secondary market transactions in circulating stablecoins should be made clearer.

A key issue for banks is the segment of transactions that issuers do not control. Stablecoin issuers currently handle token issuance and redemption and the management of reserve assets. It is not clear which party should be responsible for monitoring movements after issuance, including transfers among exchanges, DeFi protocols and private wallets.

The two groups stressed that secondary market transaction oversight is central to a stablecoin AML framework because a significant share of illicit fund flows occur after issuance. They also proposed designing the system so regulators can move beyond checking formal compliance and instead focus resources on areas with higher risks of financial crime.

The banking industry assessed that the Financial Crimes Enforcement Network (FinCEN) and the Office of Foreign Assets Control (OFAC) already recognise the issue. It pointed in particular to the fact that authorised stablecoin issuers often do not have sufficient information on secondary market transactions.

The cryptocurrency industry, by contrast, has voiced concern that broader regulation could hinder innovation. Investor firms Paradigm and the Hyperliquid Policy Center warned in a recent comment letter that if issuers are held responsible for transactions they cannot control, regulated dollar-pegged stablecoins could effectively be excluded from the DeFi ecosystem.

Some in the market also argue the regulatory gap is being overstated. Charles d'Haussy (샤를 도시), chief executive of the dYdX Foundation, said major stablecoins and DeFi platforms already operate various compliance tools.

He said major stablecoins such as USDC and USDT provide freezing and blacklist functions through issuers' master smart contracts, and that many DeFi platforms also have on-chain transaction monitoring systems. The real problem, he argued, is overseas exchanges and non-custodial wallets that fall outside the scope of the Financial Action Task Force (FATF) travel rule.

Some analysis also suggests broader regulation may not bring only negative results. Dominic John of Zeus Research assessed that clearer oversight could strengthen trust between the cryptocurrency market and traditional finance, helping expand the stablecoin market.

He said exchanges, custodians and DeFi services could face stronger know-your-customer (KYC) and transaction monitoring obligations, but in return could expect inflows from institutional investors and broader adoption within the regulated system.

The industry sees a key issue as how U.S. regulators will divide responsibilities among issuers, exchanges, custodians and DeFi protocols as they move to institutionalise stablecoin rules. It expects that whether regulators can find a balance that blocks illicit funds without hindering innovation will determine the direction of the stablecoin regulation debate.