Is the United States’ Big Bet on Stablecoins a Bet Against U.S. Sanctions? Opportunities for Congress to Strengthen Crypto Security

Executive Summary

The United States has embraced dollar-backed stablecoins as a strategic tool to modernize payments and maintain its leadership in financial innovation. The 2025 GENIUS Act established the first comprehensive federal framework for crypto, but focused exclusory on stablecoin issuers, while the pending CLARITY Act seeks to define broader rules for digital asset markets. Yet, the same features that make stablecoins attractive for licit financial transactions—speed, low transaction costs, and reduced reliance on traditional financial intermediaries—have also made them the money laundering tool of choice. Stablecoins enable the transfer of value outside many of the jurisdictional chokepoints that underpin the effectiveness of U.S. financial sanctions, with stablecoins now accounting for 95% of all crypto inflows to sanctioned entities. As states, terrorist organizations, and drug cartels increasingly turn to stablecoins to avoid U.S. sanctions, getting the regulation of stablecoins right is no longer a financial priority but also a national security priority.

As Congress considers the future of digital asset regulation, it faces a central policy challenge: preserving the economic and geopolitical benefits of stablecoin adoption while preventing the emergence of a parallel financial infrastructure that weakens U.S. sanctions power. Although the GENIUS Act extends anti-money laundering, know-your-customer, and sanctions obligations to stablecoin issuers, significant gaps remain across the broader decentralized finance (DeFi) ecosystem. Current legislation only partially covers or completely excludes mixers, bridges, decentralized exchanges, and other non-custodial tools most often used to facilitate sanctions evasion. To safeguard both national security and dollar dominance, Congress should pursue a layered regulatory strategy that extends compliance obligations beyond issuers, embeds sanctions controls at critical blockchain transaction chokepoints, and adapts sanctions authorities to the realities of blockchain-based finance.

Key Assessments:

• Stablecoins create a growing sanctions-enforcement challenge. By enabling financial transfers outside traditional banking infrastructure, stablecoins reduce reliance on the financial intermediaries and payment systems through which the United States exercises significant sanctions jurisdiction globally. Sanctioned states, terrorist organizations, and criminal networks exploit these features to move funds and evade financial restrictions.
• Current U.S. legislation addresses stablecoin issuers but leaves major vulnerabilities. The GENIUS Act strengthens oversight of stablecoin issuance, but both the GENIUS and CLARITY Acts leave significant gaps involving mixers, bridges, decentralized exchanges, and other protocols associated with money laundering and sanctions evasion.
• Congress can strengthen both sanctions effectiveness and dollar dominance through targeted regulation. 
  • Remove statutory exemptions for DeFi protocols and subject blockchain infrastructure facilitating financial transactions to the same regulatory scrutiny applied to traditional financial intermediaries.
  • Extend AML and sanctions requirements to DeFi services.
  • Require stablecoin issuers and off-ramp providers to implement transaction monitoring and suspicious activity reporting.
  • Mandate sanctions screening during the minting, transfer, and redemption of stablecoins.
  • Impose clear sanctions compliance obligations on exchanges, liquidity pools, over-the-counter desks, and other intermediaries that facilitate stablecoin transactions.
  • Limit access to regulated U.S. markets and financial services for foreign stablecoins whose issuers fail to meet standards for audits, AML programs, and sanctions compliance.
  • Expand the U.S. nexus requirement in sanctions legislation to include use of USD-pegged stablecoins.

Introduction

On April 1, 2026, after weeks of holding the Strait of Hormuz and 20% of global oil hostage, Iran announced that it would allow vessels to transit the Strait provided they pay a toll using Chinese yuan or stablecoins.¹ For Iran, stablecoins provided the perfect solution to its desperate need for cash. As a decentralized financial (DeFi) tool, stablecoins can easily skirt the nearly ubiquitous sanctions preventing global financial institutions from processing transactions for Iranian oil. And Iran is not alone in its preference for stablecoins. In 2025, Russia evaded Western sanctions by funneling $70 billion worth of stablecoins to fund its military.² In 2024, ISIS-Khorasan used stablecoins to finance its Crocus City Hall attack near Moscow, which killed over 140 people.³

Stablecoins have become the preferred method for terrorist organizations, drug cartels, and rogue states to evade far-reaching U.S. sanctions because it facilitates blockchain payments without relying on traditional financial institutions. This same decentralized nature, however, is also the central appeal of stablecoin for licit uses—it provides stability by being pegged to fiat currency while reducing transaction costs and time by eliminating the need for cross-border clearinghouses or settlement banks. In 2025, the United States bet big on stablecoins with passage of the GENIUS Act, the first comprehensive U.S. crypto law that creates a framework for dollar-backed stablecoins.⁴ Although the GENIUS Act generally clarified that stablecoin issuers must comply with the same sanctions, anti-money laundering (AML), and know-your-customer (KYC) requirements as banks, it left many of the security details for the larger crypto ecosystem to a crypto market structure bill, the CLARITY Act. As Congress now debates the CLARITY Act, both the draft bill and the GENIUS Act leave glaring holes for illicit actors to exploit.⁵

This policy brief explores the security risks posed by stablecoins as a tool for sanctions evasion. Financial sanctions have become an indispensable tool of U.S. foreign policy and national security because they leverage U.S. dollar dominance to target adversaries without the use of force. Yet, 2025 witnessed a 694% increase in crypto received by sanctioned entities, with 95% of all inflows to sanctioned entities facilitated by stablecoins.⁶

As Congress considers the CLARITY Act and broader digital asset regulation, it faces a critical policy challenge: How does the U.S. government harness the economic benefits of stablecoins while mitigating their growing use to evade U.S. sanctions?

DeFi and Stablecoins

The Digital Asset Landscape

To understand the rise of stablecoins as a tool for licit and illicit transactions, it is helpful to understand how stablecoins relate to the larger digital asset landscape. At their core, digital assets are assets minted or exchanged on a blockchain, a decentralized ledger that securely records transactions across a network of computers. Through a distributed, decentralized model, digital assets eliminate the need for traditional financial intermediaries like banks for clearing and settling financial transactions.⁷ Instead, digital assets rely on public, on-chain verification to validate transactions, though the method of verification varies. 

Because of their dispersed nature, the larger category of digital assets is often labeled decentralized finance (DeFi). And beyond the use of the blockchain, DeFi transactions almost always rely on so-called “smart contracts”—pieces of code that self-execute when specific requirements are met. These agreements immediately execute upon conditions in their code being met, typically for the release of funds once the originating asset is verified on-chain.⁸

DeFi payments typically use assets falling into four categories: crypto coins; stablecoins; central bank digital currencies (CBDC); and digital securities. (See Annex 1 for a full comparison of each). Crypto coins, such as Bitcoin and Ethereum, are native to their respective blockchains and derive their value from market demand, resulting in significant price volatility that limits their use as reliable payment instruments. By contrast, a stablecoin is a digital token whose value is pegged to a specific asset or collection of assets.⁹ Most stablecoins are pegged to a country’s fiat currency, but they can also be collateralized using a commodity (gold, oil), other crypto (Bitcoin), or not collateralized at all.¹⁰ Fiat-backed stablecoins comprise 87% of all stablecoins issued and of those, 99% are backed by the U.S. dollar (USD).¹¹

This relative price stability, combined with the speed and programmability of blockchain transactions, explains why stablecoins have become the preferred medium of exchange within the digital asset ecosystem. Stablecoin market capitalization has surged to over $300 billion, a 75% increase from the previous year.¹² As of April 2026, USDT (Tether) and USDC (Circle) dominate the stablecoin landscape with over 80% market share, accelerating growth with over $34 trillion in annual transaction volume.¹³

Because stablecoins can be privately issued, provide stability over crypto coins, leverage the security of the blockchain, and reduce transaction time and fees by cutting out intermediaries, they are now attracting major interest from global banks and corporations. JPMorgan has already issued its own stablecoin, while Bank of America, Citigroup, and Wells Fargo are considering following suit.¹⁴ Meanwhile, corporate giants like Walmart and Amazon are actively pursuing their own stablecoins.¹⁵ In the next five years, stablecoins could dominate cross-border corporate and individual transactions.

The Promise and Peril of Stablecoins

Stablecoins hold significant promise in global finance because they combine the price stability of fiat currency with the efficiency of blockchain payment systems. By enabling near-instant, low-cost, and 24/7 cross-border transactions, they reduce frictions inherent in traditional cross-border banking networks, where transfers are often slow, opaque, and expensive.¹⁶ This makes them particularly valuable for remittances and international trade. For example, the World Bank estimates that in the world’s largest remittance corridor between the United States and Mexico, it costs $9.61 to send $200, whereas crypto transactions cost between $1 and $2 regardless of the amount transferred.¹⁷ With global remittances reaching an all-time high last year at over $850 billion, research suggests that stablecoin-enabled transactions could add $10 to $30 billion to receiving countries’ economies through savings on fees.¹⁸ For businesses and individuals in developing countries, stablecoins can also expand financial inclusion to reach unbanked populations or regions with underdeveloped banking infrastructure. Stablecoin also can provide the stability of the U.S. dollar for payments in places like Argentina, Nigeria, and Turkey, where high inflation and exchange rate drops have devalued local currencies.¹⁹

In international trade, stablecoins offer the possibility of near-instant settlement. For small- and medium-sized exporters, this helps free up working capital and increase trade efficiency by not having to wait for intermediary banks to be open to process transactions. The smart contract system also adds benefits: allowing for features like automated payments, conditional settlement (e.g., auto-releasing funds upon delivery), and enhanced transparency for transaction records. 

Simultaneously, the decentralization of stablecoins and other crypto assets also exposes them to two primary risks. First, the stablecoin ecosystem relies on the financial stability and transparency of private issuers. Stablecoin holders must trust that the coin issuer has adequate reserves and can immediately fulfill requests to convert coins to fiat. In 2022, for example, issuer TerraUSD experienced a run on its stablecoin that caused it to break its peg and holders to lose $45 billion in value.²⁰ Because stablecoins’ pegging and reserve structure are central features of their stability, the issuer’s transparency about liquidity becomes all the more important. As the Bank of England recently observed, “Stablecoins rely on the integrity and regulation of their issuers, so safety depends on transparent reserves and credible oversight.”²¹ In this respect, Tether—the world’s largest stablecoin issuer which is registered in the British Virgin Islands and operates out of El Salvador—has faced considerable scrutiny about its transparency and reserves:

The second primary risk of stablecoins is their prevalent use for money laundering and terrorist financing. 2025 saw the highest illicit cryptocurrency rates in history, with over $154 billion in illicit funds transiting the blockchain, a 162% increase in only one year.²² Although that represents a small fraction of total blockchain payments (2.7% according to one recent study²³), it demonstrates a concerning trend for national security policy. Adversaries turn to stablecoin in particular for three reasons: 

• Time: The high speed of on-chain transactions makes them harder to intercept than traditional payments.
• Evasion: On-chain payments allow transfers to avoid traditional compliance chokepoints (e.g., correspondent banks and inter-bank messaging systems).
• Anonymity: While blockchain ledgers are traceable in principle, wallet addresses are not tied to real-world identities and users can layer transactions across multiple wallets, protocols, or chains to cover their tracks.

Together, these elements make stablecoin a “dream currency” for money launderers.²⁴ In busting a multi-billion Tether-based laundering scheme with links to Russian oligarchs and drug traffickers, UK authorities observed, “Tether has replaced bitcoin to become the ‘cryptocurrency du jour.’”²⁵ Stablecoins have now been linked to plots and attacks by terrorist groups, drug cartels, and adversary states.

Most troubling, stablecoins appear to be dislodging fiat cash for illicit actors. Experts estimate that the share of illicit crypto activity may be five times that of the share of illicit fiat activity.³⁹

Mixers, Swaps, and Bridges

Beyond digital assets themselves, the DeFi ecosystem now includes several tools that enable on-chain transactions, but they also help illicit actors conceal their identities and the destination of their funds. Exchanges are platforms where users convert between fiat and cryptocurrencies or trade digital assets; they function as entry and exit points to the crypto ecosystem. Bridges connect separate blockchain networks, allowing assets to move across ecosystems (e.g., Ethereum to another chain). Mixers (or tumblers) are services that obscure transaction trails by pooling and redistributing funds among many users, breaking the direct on-chain link between sender and recipient. Swaps enable users to trade one cryptocurrency for another without centralized custody, often through decentralized exchanges (DEXs). Together, these tools provide liquidity, interoperability, and transactional flexibility across the crypto economy.⁴⁰

Illicit actors exploit these same features to launder funds by layering transactions and obfuscating their provenance. A typical pattern begins with funds entering through an exchange before being routed through mixers to sever traceability. They then use cross-chain bridges to shift assets into different blockchain environments, complicating forensic tracking. Then, swaps across multiple tokens often via DEXs create a chain of conversions that obscures the asset’s origin. This multi-step “chain-hopping” leverages speed and jurisdictional gaps to evade detection and sanctions enforcement. “Cross-chain operations have become the norm for illicit actors,” with over $21.8 billion using these schemes in 2025.⁴¹

Regulators have increasingly targeted cross-chain infrastructure, focusing on both centralized intermediaries and identity-concealing tools. In 2023, the Treasury Department issued a “special measures” designation under section 311 of the Patriot Act to label mixers as a “primary money laundering concern,” effectively cutting them off from the U.S. financial system by restricting correspondent banking access and imposing due diligence requirements.⁴² At the same time, Treasury extended sanctions to decentralized tools, most notably designating mixers Tornado Cash, Blender.io, and Sinbad.io for facilitating billions in illicit transactions, including funds linked to North Korean cyber criminals.⁴³ These designations were followed by law enforcement actions to seize and take down mixer websites for Sinbad and ChipMaker as well as criminal charges filed against founders and developers of Blender.io, Tornado Cash, and Samourai Wallet.

However, enforcement efforts have faced legal and practical constraints. In 2024, a U.S. federal circuit court ruled that Treasury exceeded its authority in sanctioning Tornado Cash based on its smart contracts, finding that such code did not constitute “property” under existing sanctions law.⁴⁴ Treasury ultimately settled the case and removed Tornado Cash addresses from the sanctions list.⁴⁵ This episode underscores the evolving tension between security enforcement and the technical realities of DeFi infrastructure, as regulators explore how to apply existing financial tools to non-custodial tools like mixers, bridges, and DEXs that lack a traditional operator.

U.S. Sanctions and the Role of Stablecoins

Getting regulation of the DeFi ecosystem right matters most to national security because if left unchecked, they can evade one of the United States’ most effective foreign policy tools—sanctions. Although the term “sanctions” is often deployed broadly, covering everything from tariffs, to export controls, to embargoes, to simply unfriendly economic actions, this policy brief examines financial sanctions as the most relevant category for DeFi. 

Dollar Dominance: Why U.S. Sanctions Are So Effective

Financial sanctions operate by targeting the movement of money through the global financial system. Financial flows occur through networks of banks and financial institutions, and sanctions typically restrict a target’s ability to access or use those networks by blocking transactions, freezing assets, or denying custodial services.⁴⁶ Today, most value transfers occur through electronic claims on banks, especially wire transfers.⁴⁷ When a sanctioned entity is involved in a transaction, financial institutions subject to U.S. jurisdiction must block or reject the payment, effectively immobilizing the funds.

Cross-border transfers rely on a layered infrastructure separating communication from settlement. First, banks exchange payment instructions through messaging systems, most prominently SWIFT, which standardizes and transmits transaction data globally.⁴⁸ Second, the actual funds are transferred through banking relationships, typically via correspondent banking. In this system, a bank in one country holds an account (a “correspondent account”) with a bank in another country and uses that account to settle payments on behalf of its customers.⁴⁹ This multi-institutional structure means that most cross-border payments pass through several regulated financial nodes.

The vast majority of cross-border transactions rely on U.S. financial institutions or the USD because of the dollar’s outsized role in the global economy. The USD dominates 57% of global currency reserves⁵⁰ because of its liquidity, convertibility, and strong U.S. capital markets.⁵¹ The USD also accounts for 84% of trade financing and 88% of foreign exchange transactions.⁵² As a result, foreign banks typically maintain correspondent accounts with U.S. banks to access dollar clearing services, which are essential for participating in global markets.⁵³

The USD has also become the default intermediary in transactions involving other currencies. For example, if a buyer in Brazil seeks to pay a supplier in Thailand, few banks would directly process the payment from Brazilian real to Thai baht. Instead, the Brazilian bank debits the buyer’s account in real and then exchanges the real for USD; the USD are sent via a correspondent bank and settlement through the U.S.-controlled CHIPS or Fedwire systems; the Thai bank receives USD and converts to baht. 

This structural reliance on the dollar and U.S.-linked financial infrastructure brings a large portion of global transactions within the jurisdiction of U.S. sanctions. The USD itself does not trigger sanctions, but the clearing or settlement in correspondent accounts could require the institution to comply with blocking and freezing orders.⁵⁴ Jurisdictional hooks for U.S. sanctions include: clearing USD payments through U.S. institutions like Fedwire and CHIPS; relying on a foreign bank’s correspondent account in the United States; or involvement of a U.S.-incorporated bank or its foreign branch. Additionally, the U.S. Treasury Department has applied statutory language on “causing” a sanctions violation to extend its reach to cover transactions involving U.S. dollars even without correspondent accounts.⁵⁵ (See Annex 2).

In effect, through architecture of global finance centered on dollar dominance, U.S. correspondent banking, and U.S. infrastructure, sanctions can exclude targeted actors from the global economy altogether. 

How Stablecoins Facilitate Sanctions Evasion

The same essential feature of stablecoins making them faster and cheaper than traditional cross-border payment methods also makes them ideal for evading sanctions. On-chain transfers via stablecoin are designed to be settled and redeemed without relying on the chokepoints the United States has leveraged in U.S. dollar dominance: no need for a correspondent bank or account; no need for inter-bank SWIFT messages; no need for settlement using U.S.-based systems like CHIPS and Fedwire. Additionally, while the two most dominant stablecoins—USDT and USDC—are pegged to the U.S. dollar, pegging to the U.S. dollar alone is insufficient to trigger U.S. sanctions. (See Annex 3).

And illicit actors seeking to evade sanctions are making wide use of stablecoins. Chainalysis estimates that in 2025, the crypto value received by sanctioned entities increased by 694%, far surpassing any other criminal categories.⁵⁶ The majority of this trend is driven by states—Russia, North Korea, Iran, and China. And although Bitcoin and other cryptocurrencies possess the same sanctions evasion characteristics, stablecoin’s stability and rapid redeemability make it the preferred evasion tool. Today, nearly 95% of all crypto inflows to sanctioned entities occur in stablecoin.⁵⁷

Since the transfers themselves often do not bring the transaction within U.S. jurisdiction, authorities have increasingly turned to sanctioning crypto platforms, facilitators, and wallets. For example, in 2025, the EU designated individual crypto addresses for the first time and targeted a payment processor associated with funneling billions to sanctioned Russian entities.⁵⁸ But the ephemeral nature of blockchain actors makes them difficult to target. Sanctioning individual wallets and addresses can become whack-a-mole for transactions that occur nearly instantaneously.⁵⁹ Moreover, the U.S. government’s federal court loss and subsequent de-listing of Tornado Cash demonstrates the difficulty of applying sanctions directly to decentralized entities operating on the blockchain. The current sanctions regime is ill-suited to target distributed, permissionless, and often autonomous mixers, bridges, and exchanges on the blockchain.

Stablecoin Governance: Progress and Gaps

In 2025, the United States became a leader in the international regulation of crypto by passing the GENIUS Act. The Act focused exclusively on stablecoins and marked an important first step at providing rules and structure to a previously uncharted area of governance. While the Act applied sanctions, AML, and other security frameworks to stablecoin issuers, it left significant gaps in the ability of the U.S. government to stymie the use of blockchain infrastructure by terrorist groups, drug cartels, and rogue states.

The GENIUS Act

The GENIUS Act establishes a federal regulatory framework for USD-denominated payment stablecoins, centered on entities designated as “permitted payment stablecoin issuers.” Its sole focus on stablecoin, paired with draft legislation and Executive actions prohibiting the U.S. creation of CBDCs,⁶⁰ demonstrates that the U.S. government has bet big on stablecoin. The law has already added stability and transparency to the stablecoin market.⁶¹ Importantly, it clarifies that the Bank Secrecy Act applies to stablecoin issuers and that these issuers must be treated like other financial institutions for complying with AML and sanctions requirements.⁶²

The GENIUS Act, however, leaves significant gaps in regulating the DeFi ecosystem. It imposes no hard requirements on liquidity and leaves the possibility for large uninsured reserve deposits, potentially resulting in stablecoin runs.⁶³ It also pushes key decisions to rulemaking agencies: capital and risk management requirements; creation of the registration process for foreign issuers; and new rules for countering illicit finance.⁶⁴ Critically, its limited scope also leaves out significant crypto actors. Limitation to stablecoin issuers ignores major players in illicit activities—mixers, bridges, and DEXs. Limitation to U.S.-based issuers could also exclude altogether the largest stablecoin issuer, Tether, although the company has said it will comply with all GENIUS Act provisions.⁶⁵ The to-be-defined registration for foreign issuers subject to “comparable foreign regulations”⁶⁶ could also lead to regulatory arbitrage. That is, DeFi users, especially those seeking to launder money, will seek out the most lenient jurisdiction compatible with the GENIUS Act, creating a race to the bottom. As a result, once a compliant stablecoin is issued, it can circulate through non-custodial infrastructure and offshore intermediaries that are not subject to equivalent obligations, creating persistent blind spots.

Enter the CLARITY Act

The GENIUS Act’s passage as the first major U.S. crypto legislation was enabled largely through a promise that gaps left by the narrower stablecoin-focused law would be addressed in a larger, market structure bill. That promise turned into the CLARITY Act, which the House passed in July 2025 and the Senate is actively considering.⁶⁷ “Market structure” refers to efforts to comprehensively address crypto governance beyond stablecoins, from other digital assets to infrastructure enabling on-chain transactions. U.S. agencies already took a major step in this direction in March 2026 when the SEC and CFTC issued joint guidance clarifying laws applicable to five different types of crypto: Digital Commodities (e.g., Bitcoin, Ether); Digital Collectibles (e.g., NFTs); Digital Tools (assets performing a practical function like a credential or ticket); Stablecoins; and Digital Securities.⁶⁸ Importantly, the new rules ensure that most cryptocurrencies are treated as commodities rather than securities, thus signaling a move away from more stringent oversight by the SEC.⁶⁹ The CLARITY Act would codify this distinction, providing the CFTC with exclusive regulatory jurisdiction over transactions in digital commodities and requiring digital commodity exchanges, dealers, and brokers to register with the CFTC. Although proponents have said this move provides standardized practices across the industry, critics say it hands a win to crypto companies since CFTC jurisdiction likely reduces transparency and compliance obligations.⁷⁰

Yet, the CLARITY Act belies its name when it comes to the protocols and service providers most associated with security risks. The bill expressly exempts most DeFi tools: protocols that operate as nodes or oracles (third-party services connecting blockchains to off-chain data); providers of blockchain user interfaces; providers and administrators of blockchain infrastructure; and DeFi messaging systems and liquidity pools.⁷¹ This exclusion has been tabbed a DeFi safe harbor because crypto advocates view writing software as distinct from running a financial business. The same argument prevailed in U.S. federal court to protect Tornado Cash and would cement in statute the inability for financial sanctions and regulations to reach most DeFi tools.

The CLARITY Act also leaves mixers and other anonymity tools completely unaddressed. And while its regulation of crypto exchanges is a huge step forward, it leaves unregulated decentralized exchanges, which use smart contracts to swap tokens and are commonly used among crypto launderers. Finally, the exclusion of payment stablecoins means that no transparency enhancements from the bill can help fill gaps left by the GENIUS Act. Together, this excludes significant portions of the DeFi ecosystem most responsible for facilitating money laundering and sanctions evasion.

Although the Senate Banking Committee voted out a revised version of the bill to the Senate floor in May 2026, those revisions did not address these concerns. Rather, much of the Senate debate concerned a showdown between banks and crypto companies on whether stablecoin should be allowed to pay interest, and another revision substantially carved out “node-as-service-providers” (validators, sequencers, and oracles), which heavily favors the crypto industry.⁷² The only security enhancement was a minor adjustment to clarify that the existing federal criminal money transmitter statute could still apply to certain crypto transactions. This preserves, for example, criminal cases against Tornado Cash founders, but was scoped to only criminal cases and only with evidence of specific intent,⁷³ becoming too narrow to have a meaningful impact on overall money laundering practices.

Strategic Policy Considerations: Innovation, Security, and Dollar Dominance

Efforts to regulate stablecoins and the broader DeFi ecosystem require policymakers to navigate three competing objectives: promoting financial innovation, safeguarding national security, and preserving the global role of the U.S. dollar. Policies that advance one objective often impose costs on the others.

• Innovation vs. security. A permissive regulatory environment supports the growth of U.S.-based stablecoin issuers and blockchain innovation, reinforcing U.S. leadership in financial technology. However, the same features that enable innovation also facilitate sanctions evasion, money laundering, and terrorist financing. Expanding regulatory coverage to DeFi protocols and non-custodial services would improve security but risks driving innovation offshore and to less transparent jurisdictions.
• Regulatory reach vs. technical feasibility. Traditional financial regulation relies on identifiable intermediaries, yet much of the DeFi ecosystem operates through autonomous code without a central operator. Extending AML and sanctions obligations to these systems raises complex legal and technical questions, including whether software developers or protocol participants can reasonably be treated as regulated entities.
• Sanctions effectiveness vs. dollar dominance. USD-pegged stablecoins have the potential to reinforce dollar dominance by expanding the global demand for dollar-denominated assets (e.g., U.S. Treasuries). At the same time, if stablecoins continue to provide a parallel financial infrastructure that bypasses U.S. jurisdiction, they may erode the effectiveness of U.S. sanctions. Policies that tighten compliance requirements could preserve sanctions power but may reduce the attractiveness of U.S.-regulated stablecoins relative to alternatives.

The policy challenge for Congress is not to eliminate risk entirely but to calibrate regulation in a way that meaningfully reduces national security vulnerabilities while preserving the economic advantages of stablecoin innovation.

Recommendations for Congress

As the Senate considers the CLARITY Act, it must balance the benefits of a detailed market structure bill with the perils of calcifying common methods to evade U.S. sanctions. On the one hand, the GENIUS and CLARITY acts would form the most comprehensive regulation of digital assets in the United States, providing stability to a growing marketplace and position U.S. companies to expand their dominance in the space. On the other hand, neither act addresses the major losses for U.S. national security posed by legitimizing sanctions-evading tools and protocols. In fact, the CLARITY Act’s DeFi “safe harbor” would codify the very weaknesses in the system that sanctions evaders exploit.

To address these concerns while balancing the benefits of promoting a reliable, fast, and useful digital asset ecosystem, the U.S. Congress should consider steps to both strengthen the CLARITY Act and fundamentally rethink how U.S. sanctions jurisdiction maps onto the digital asset ecosystem.

1. Close the DeFi loophole. Eliminate DeFi exclusions from the CLARITY Act. Current exemptions would leave unregulated most tools that facilitate sanctions evasion. Claims that DeFi protocols are just code ignore their clear link to underlying finance and their very purpose in facilitating blockchain payments. Just like governments regulate how money transits the fiat economy—such as messaging services and wires—so too should the government impose requirements on the full spectrum of DeFi protocols, not just stablecoin issuers and centralized exchanges.
2. Extend meaningful AML and sanctions compliance requirements to crypto and stablecoin mixers, bridges, and DEXs. Enable the Treasury Department to impose requirements on DeFi tools when they act as financial institutions. The Bank Secrecy Act already defines financial institutions as including currency exchanges, issuers and redeemers of instruments “similar” to checks and money orders, and “a licensed sender of money or any other person who engages as a business in the transmission of currency, funds, or value that substitutes for currency.”⁷⁴ Since the GENIUS Act treats payment stablecoins as a form of money, a path to coverage for stablecoin mixers, bridges, and decentralized exchanges already exists. Congress should consider amending the Bank Secrecy Act to expressly cover DeFi services and protocols that facilitate stablecoin transfers, transactions, and redemption.
3. Impose ecosystem monitoring, especially for stablecoin issuers and off-ramp service providers. Treasury (through FinCEN) should be empowered to issue binding guidance for providers at both ends of stablecoin transactions—minting and redeeming. Issuers and off-ramp service providers should be required to report suspicious activities. The technology for this already exists through zero-knowledge proofs and “compliance oracles.” Another option would be to authorize a licensing scheme for regulated entities (issuers, exchanges, custodians, etc.) to distribute KYC- and AML-compliant smart contracts, essentially incentivizing compliance as a service.⁷⁵
4. Mandate sanctions screening at stablecoin mint, transfer, and redemption chokepoints. This requires embedding compliance controls at the points where fiat and blockchain systems intersect and where value changes hands. The GENIUS Act covers the issuer step (minting), but transfer and redemption remain unregulated. During transfers, screening can be enforced through smart contract logic or middleware that checks wallet addresses and transaction patterns against updated sanctions lists. At redemption, off-ramp providers should be required to screen users before converting stablecoins back into fiat, preventing sanctioned actors from exiting the blockchain with usable funds.
5. Extend requirements to stablecoin intermediaries. Most stablecoins flowing to sanctioned entities are not directly redeemed from the issuer itself. Instead, users off-ramp their stablecoin using secondary markets (Coinbase, Kraken, Binance, etc.) by selling their stablecoin to other users and taking in return an exchanged token or tokens from pooled liquidity. In 2023, Binance paid the U.S. government a $4.3 billion settlement regarding sanctions and money laundering violations, and it has faced recent scrutiny for failing to block $1 billion of sanctioned transactions to Iran.⁷⁶ The CLARITY Act covers exchanges but should also cover other intermediaries like liquidity pools and over-the-counter desks, and the bill should more clearly define the sanctions compliance requirements for all intermediaries.
6. Target offshore and non-compliant stablecoins. Regulators can restrict regulated exchanges and banks from listing or settling with risky stablecoins. Regulators can require licensed exchanges, banks, and payment providers to only support stablecoins whose issuers meet defined standards for reserve backing, independent audits, AML programs, and sanctions compliance. In practice, this means delisting non-compliant tokens from regulated trading venues, prohibiting their use in fiat settlement, and restricting their integration into payment rails and off-ramp channels.
7. Leverage USD-pegging as a jurisdictional hook for sanctions. Currently, pegging to the USD alone does not trigger the application of U.S. financial sanctions, but Congress can legislate ways to leverage USD-pegging to impose sanctions compliance. As an initial step, Congress could essentially white-list sanctions-compliant transactions. To do so, it could prohibit stablecoin issuers, exchanges, and other virtual asset service providers from using smart contracts involving USD-pegged stablecoins unless the smart contract complies with AML and sanctions requirements. Next, Congress could require custodial wallet providers to implement sanctions screening for any wallets with USD-backed stablecoin. This could expand the scope of sanctions screening beyond just stablecoin issuers. Additionally, Congress could encourage, and the Treasury Department could pursue, imposing secondary sanctions on foreign financial institutions that transact with DeFi providers who facilitate sanctions evasion. This could essentially cut off providers from fiat capital and benefiting from fees collected for their services. Finally, Congress could expand the U.S. nexus requirement in sanctions legislation to include use of USD-pegged stablecoins, essentially eliminating the loophole created by the Tornado Cash case. Each of these steps would mark a substantial change in U.S. sanctions and crypto policy, but Congress and the Executive Branch need to not only apply sanctions to nefarious actors but creatively rethink how to apply U.S. sanctions jurisdiction to blockchain transactions.

Conclusion

Stablecoins represent both a strategic opportunity and a growing vulnerability for the United States. As USD-pegged digital assets expand the reach of U.S. financial influence, they also enable adversaries to bypass the very sanctions architecture that traditionally accompanies that influence. The GENIUS and CLARITY acts mark important progress in establishing a regulatory foundation, but their current gaps—particularly across the DeFi ecosystem—risk entrenching pathways for sanctions evasion. Congress therefore faces a narrow window to align digital asset regulation with national security priorities. Offense-dominant risks are best addressed through layered defenses, and addressing stablecoin-enabled sanctions evasion necessitates combining multiple legal improvements: extending regulatory coverage to digital intermediaries; embedding compliance at blockchain payment chokepoints; and leveraging the unique role of USD-backed stablecoins for new sanctions jurisdiction.