Coin Center has asked the US Department of the Treasury to tighten parts of its proposed GENIUS Act regulations so routine blockchain activity is not swept into criminal liability for unlawful payment stablecoin issuance.

In a public comment dated October 20, the nonprofit policy group argued that the draft rule is too broad around what it means to “participate” in an illegal issuance. It said the final text should make clear that validators, node operators, block builders and independent liquidity providers are not liable merely for performing ordinary technical functions or supplying secondary-market liquidity.

Focus on the participation standard

The filing centers on proposed section 1523.2(d), which lists conduct that could be treated as participation in an unlawful payment stablecoin issuance under 12 U.S.C. § 5902(f). Under the GENIUS Act, only a permitted payment stablecoin issuer may issue a payment stablecoin in the United States, and a person who knowingly participates in violating that rule can face criminal penalties.

Coin Center said paragraphs 1523.2(d)(2) and (3), as drafted, could be read to cover activities Congress separately excluded from the definition of a digital asset service provider in 12 U.S.C. § 5901(7)(B). In its view, that creates uncertainty for participants engaged in validating transactions, operating distributed ledgers, or taking part in liquidity pools and similar mechanisms for peer-to-peer liquidity.

What Coin Center wants changed

On proposed section 1523.2(d)(2), Treasury describes participation as coordinating with an issuer to facilitate key steps in issuance, including soliciting customers or minting stablecoins. Coin Center said the word “coordinates” is too open-ended unless Treasury ties it to an agreement with the issuer and conduct undertaken for the purpose of materially facilitating the issuance.

The group warned that otherwise unaffiliated network participants could be exposed because their technical actions help process an issuance transaction in practice. It specifically pointed to block builders, block proposers, nodes and validators that include, relay, attest to, or validate a transaction. According to Coin Center, knowingly handling a transaction is not the same as knowingly participating in an unlawful issuance, especially where there is no agreement, communication, or other relationship with the issuer.

Secondary-market liquidity is another concern

Coin Center also objected to the breadth of proposed section 1523.2(d)(3), which covers a person acting as a market maker for newly issued payment stablecoins, distributing those tokens to purchasers, or otherwise making them available for secondary-market trading. The organization said the proposal does not define “market maker,” while the surrounding language could reach independent activity that happens soon after issuance.

As an example, it said an unaffiliated person who creates an automated market maker pool and supplies liquidity shortly after issuance could be treated as participating in the unlawful issuance simply because the pool enables trading. Coin Center argued that timing alone should not convert independent secondary-market conduct into participation. It asked Treasury to codify a narrower standard limited to cases where a person acts under an agreement with the issuer and for the purpose of materially assisting the issuer’s initial distribution.

Other parts of the proposal

Beyond the participation provisions, Coin Center said Treasury’s proposed definition of “issuer” is appropriate and should keep its existing two-part structure. The group urged Treasury not to make minting or creating a payment stablecoin, by itself, enough to qualify someone as an issuer, arguing that minting can be a technical function performed by independent developers, service providers, or other network participants without an issuer relationship.

Coin Center also backed proposed section 1523.4(c), which implements statutory exemptions for three categories of transactions under 12 U.S.C. § 5902(h)(1). Treasury had asked whether those categories were clear, and Coin Center said they were and should be left unchanged.

Next step in the rulemaking

Coin Center’s comment asks Treasury to write explicit limits into the final rule rather than rely on examples or preamble language alone. Its proposed approach would require an issuer-specific connection and purposeful, material or substantial assistance before criminal liability could attach under the participation standard.

Treasury will decide whether to revise the proposed GENIUS Act regulations after reviewing public comments. Coin Center said narrower text would still let Treasury target deliberate assistance in unlawful issuance while avoiding criminal exposure for independent software development, network operation, transaction validation, and liquidity provision standing alone.

Source: www.coincenter.org