Will the Stablecoin Industry’s Compliance Dilemma Be Solved in Our Lifetime?

Money movement is, ultimately, all about counterparties.

This simple fact has long frustrated the crypto community, particularly as it relates to its upstream implications around know-your-customer (KYC) and anti-money-laundering (AML) checks.

Cryptocurrency, after all, was created to remove the need for intermediaries. But with stablecoins being hailed as the killer application of blockchain, with their tokens pegged to a fiat currency, like the U.S. dollar, poised to move as freely as email across borders and back offices alike, the trilemma of privacy, compliance and speed across blockchain transactions is becoming a key challenge.

At first glance, privacy might sound like a niche concern. Stablecoins are, at the end of the day, designed to be almost wholly transparent. Most run on public blockchains where every transaction is visible. For regulators, that visibility is a feature, not a bug; it enables forensic analysis of flows and supports compliance.

Still, history counsels humility. The Internet itself has wrestled with privacy versus compliance for decades, from encrypted email to HTTPS, with uneven results. Digital identity systems remain fragmented even after 30 years of effort. Stablecoins, by layering money, law and cryptography, may face an even steeper climb.

That’s because blanket privacy is equally unacceptable. Regulators demand the ability to monitor flows, trace illicit actors, and ensure compliance with global AML standards. A system that delivers complete anonymity, like cash in digital form, may invite abuse.

See also: Big Banks Pile Into Stablecoin Infrastructure as Wall Street Eyes Crypto Custody 

Consumers assume a baseline of confidentiality in financial transactions. Few would tolerate their employer, neighbor or competitor seeing their coffee purchases or health-related expenses. In traditional banking, privacy is preserved by intermediaries who hold ledger data but do not expose it publicly.

Across the stablecoin landscape, several approaches have emerged. Privacy-preserving technologies like zero-knowledge proofs (ZKPs) allow users to validate transactions without revealing sensitive details. Some networks have experimented with “selective disclosure,” in which certain parties, such as regulators, can see through the veil when needed. Others use permissioned pools, where only KYC’d participants can transact.

Another line of experimentation centers on permissioned environments layered atop public networks. Here, stablecoins can only be used within “KYC’d pools,” where every participant has been identity-verified. Once inside, transfers are fast and pseudonymous, offering some privacy from peers but ensuring regulators know each participant is pre-screened.

These systems sacrifice the open, permissionless ethos of crypto in favor of walled gardens. They may succeed in institutional adoption, but they look less like digital cash and more like upgraded databases.

These tools are promising, but none have reached the scale or distribution that would convince a global bank to commit. In part, that’s because the market is fragmented: dozens of projects are experimenting, but none have won broad adoption. And in finance, adoption itself creates value. Without network effects, even the best-designed system lacks utility.

At the same time, privacy technologies can be computationally expensive, limiting throughput. And permissioned pools, while regulatory-friendly, reduce interoperability and liquidity. Each solution tackles part of the trilemma, but none deliver the trifecta of privacy, compliance, and speed that the landscape may ultimately require.

Read more: Washington’s Fall Agenda Puts Crypto, Banking Rules in the Crosshairs

What could change the equation is government action. Regulators around the world insist on rigorous KYC/AML compliance. Financial institutions must be able to identify account holders, monitor suspicious patterns, and report illicit flows. This isn’t optional. It’s embedded in international standards from the Financial Action Task Force (FATF) and enforced through hefty fines. For stablecoin issuers, the dilemma is acute: build privacy features too strong, and regulators balk; build compliance controls too tight, and privacy vanishes.

PYMNTS covered how several global financial trade associations are calling on the Basel Committee on Banking Supervision (BCBS) to reconsider the Crypto Asset Exposure Standard (SCO60) before its January 2026 effective date.

The U.S. is already pushing forward with its own policy framework governing stablecoins, although the Treasury Department is seeking comments on the recently passed stablecoin law, the GENIUS Act, to inform research on methods to detect illicit activity involving digital assets

The likeliest outcome may be incremental: niche stablecoins serving specific needs (cross-border remittances, institutional settlement) while broader adoption lags. The trilemma may never be perfectly solved. But it may be managed well enough to fade into the background, as users come to trust stablecoin systems without obsessing over their mechanics.

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