- The 2024 National Defense Authorization Act amendment may introduce stringent KYC and AML regulations that could pose a compliance challenge for stablecoin issuers.
- The regulatory change could negatively impact Coinbase, which garnered 27% of its net revenue from interest income on USDC in Q1 this year.
The US Senate’s recent approval of the 2024 National Defense Authorization Act (NDAA) has the potential to stir regulatory waves that could engulf Circle’s USD Coin (USDC) and other stablecoin issuers. According to an investment note from Berenberg analyst Mark Palmer, the NDAA’s amendment could mandate Know Your Customer (KYC) and Anti-Money Laundering (AML) protocols that stablecoin issuers may struggle to meet.
Regulatory Quandary for Stablecoins
The proposed amendment calls for the US Treasury Secretary to develop examination standards for crypto assets, aiming to fortify adherence to anti-money laundering and sanctions laws. If included in the final version of the NDAA, this amendment could create a compliance conundrum for stablecoins. Palmer cautions that stablecoin holder identities can only be verified during issuance and redemption, a limitation that could negatively impact USDC’s market cap, which has already seen a 39% drop since March 5.
This prospective regulatory hiccup could not only pose a substantial setback for Circle but could also affect Coinbase. Palmer highlights that the leading crypto exchange derived 27% of its net revenue in Q1 from interest income on USDC.
Coinbase’s stock performance has notably outpaced traditional equities in the current year, registering a 170% surge from January 1. The favorable judgment granted to Ripple Labs and the influx of spot Bitcoin ETF filings from industry giants like BlackRock and Fidelity have primarily driven this rally.
However, the drivers behind Coinbase’s bullish run may stand on shaky ground, given recent statements from SEC Chair Gary Gensler. In a July 28 interview, Gensler cautioned crypto investors about assuming that digital currencies are outside the SEC’s purview. His lukewarm response to Bitcoin ETF applications suggests potential opposition to their approvals.
Berenberg maintains a “hold” rating for Coinbase stock, acknowledging that while the future holds significant uncertainty, Coinbase’s hefty cash and equivalents balance provides a safety net and allows for flexibility in navigating the road ahead.