Circle Internet Financial and Paxos Trust Company have announced the launch of a pilot program for a ‘know-your-issuer’ system aimed at verifying the legitimacy of stablecoin issuers and combating counterfeit tokens according to new U.S. standards.
How the System Works
The verification system, developed in partnership with fintech startup Bluprynt, embeds cryptographic proof-of-issuer credentials directly into stablecoin transactions. This allows tracking of verified issuers of USD Coin (USDC), PYUSD, and USDP tokens in real time. The system eliminates the need for third-party audits and prevents ‘copycat’ tokens that mimic genuine stablecoins but lack necessary reserves or regulatory clearance.
Broader Context and Regulatory Standards
The pilot program closely aligns with the recently passed GENIUS Act, which sets federal standards for dollar-backed stablecoins. This regulatory framework is expected to speed up adoption and potentially push stablecoin usage into the trillions, given the current market valuation of approximately $273 billion.
Impact on the Stablecoin Market
Circle and Paxos plan to function under a single federal regulator. For example, on August 11, Paxos reapplied for a national trust bank charter to expand its operations. The KYI model may also apply to other GENIUS Act-compliant tokens, enhancing investor trust and DeFi integrations while assisting regulators by embedding tracking information at the protocol level.
The launch of this issuer verification system represents a significant step towards enhancing the reliability and trustworthiness of stablecoins, which is crucial for their further adoption in financial markets.
