Stablecoins Meet Real World Commerce, but KYC Keeps Breaking the Experience

Operating under a nation’s laws doesn’t mean that a business is necessarily complying with them.

Innovation, after all, can often outpace regulation. The digital asset sector is well aware of this tension, and as the industry matures it is facing the challenge of striking that balance anew, particularly around the emergence of stablecoin-linked cards.

On Monday (March 30), for example, cross-border payments/card issuance company Nium launched a stablecoin card issuance platform. The platform joins an increasingly crowded marketplace. Visa earlier this March announced it was extending its partnership with Stripe-owned stablecoin infrastructure platform Bridge to bring stablecoin cards to over 100 countries, and on Sunday (March 29), Singapore-based stablecoin payment infrastructure company StraitsX announced it has been seeing a surge in stablecoin card transaction volume.

Stablecoin cards sit at the intersection of two very different systems. On one side is the blockchain, where transactions are transparent, programmable, and, in many cases, pseudonymous. On the other side are global payment networks and issuing banks, governed by strict regulatory regimes that demand clear identity, traceability and risk control.

To bridge this gap, issuers typically rely on a layered architecture. A user holds stablecoins in a custodial or semi-custodial wallet managed by a FinTech platform. When they swipe a card, the platform converts those tokens into fiat currency in real time or draws on a prefunded fiat pool backed by stablecoin reserves. The transaction is then processed through conventional card networks, settling with merchants just like any other debit purchase.

At a glance, the system appears elegant. The user interacts with crypto; the merchant receives fiat; the complexity is abstracted away.

But the abstraction can increasingly break down at the point of compliance.

“A key area of concern … is the potential for stablecoin use in money laundering or terrorist financing, since bad actors can purchase stablecoins in secondary markets that may not have customer identification requirements,” said Federal Reserve Governor Michael S. Barr in a Tuesday (March 31) speech.

See also: Behind the Stablecoin Buzz, Old-School Infrastructure Still Runs the Show

Black Box of Blockchain Risk

Stablecoin-linked cards are meant to make crypto spendable anywhere, but in practice, they’re exposing a fundamental clash between digital assets and jurisdictional compliance. As issuers partner with traditional payment networks, users are encountering repeated identity checks, frozen accounts and opaque risk decisions.

On-chain assets do not carry the same embedded identity signals as traditional bank deposits. A stablecoin balance may be fully legitimate, but its provenance, including how it moved across wallets, through which protocols, and under what conditions, can be difficult to assess using conventional risk frameworks.

Compounding the problem is the opacity of decision-making. When a traditional bank freezes an account, the reasons are often generic but broadly understood: suspected fraud, unusual activity, regulatory flags. In the context of stablecoin cards, the triggers are less intuitive.

Issuers, for their part, must reconcile blockchain analytics pulled from tracking wallet histories, smart contract interactions, and token flows with traditional anti-money laundering (AML) frameworks that may not have been designed for such data. The models that emerge, then, are necessarily probabilistic, flagging patterns that may correlate with risk but do not map neatly onto user intent.

PYMNTS covered at the start of the year how stablecoin firms such as Kontigo and BlindPay reportedly had accounts frozen by JPMorgan Chase after what one executive described as “a bunch of people [coming] in over the internet.”

The phrasing, PYMNTS noted, was telling in how it captured the core compliance anxiety around stablecoins: open access at global scale, combined with limited visibility into counterparties.

See also: Stablecoins’ Shadow FX Market Is Becoming a Corporate Treasury Issue

Future of Embedded Compliance

At its heart, the problem is a mismatch between two different models of trust. Blockchain systems rely on cryptographic verification and transparent ledgers, where trust is embedded in code and consensus mechanisms. Traditional financial systems rely on institutional trust, where intermediaries enforce rules, verify identities, and manage risk.

If stablecoin-linked cards are to fulfill their promise, the industry will need to move beyond superficial fixes. This may involve rethinking how identity is established and maintained in a crypto-native context, developing more nuanced risk models that can interpret on-chain behavior without defaulting to conservative assumptions, and aligning regulatory frameworks with the realities of decentralized systems.

At the same time, recent research by PYMNTS Intelligence shows that businesses that wish to use stablecoins are more interested in joining forces with banks than with crypto wallets.

Those wallets, while efficient, “introduce unfamiliar risks: private key management, fragmented reporting, uncertain custody standards and evolving regulatory interpretations,” PYMNTS wrote earlier this month. “Banks, by contrast, provide a trust layer that CFOs already understand.”