[tonyhb]

Each state has different laws regarding KYC, AML and money transmitter status. For example, in all states but California payroll companies are money transmitters.

It's annoying, but requiring a state-issued ID instead of a federal ID satisfies some of their legal requirements and makes the verification process much easier on their side.

Could they do this with a federal ID? Probably. It'd be a completely new verification process - not automated. They may need to request recent bills for proof of address, plus the necessary tooling to store/verify these.

It's the same reason you can't wander into a bank with a green card and be like "open an account". You need proof of address, state residency etc.