Paradigm and Hyperliquid Urge Treasury to Narrow Stablecoin AML Rule

TLDR

Paradigm and the Hyperliquid Policy Center have asked the U.S. Treasury Department to revise a proposed anti-money-laundering rule for stablecoin issuers, arguing that parts of the draft could make issuers responsible for decentralized finance transactions they cannot control.

The comment letter was directed at the Financial Crimes Enforcement Network and the Office of Foreign Assets Control. Both agencies proposed the rule in April as part of the implementation of the GENIUS Act, which was signed into law in July 2025.

The GENIUS Act treats permitted payment stablecoin issuers as financial institutions under the Bank Secrecy Act. That classification subjects issuers to anti-money-laundering and sanctions-compliance duties, including obligations related to customer monitoring, suspicious activity reporting, and restricted transactions.

Paradigm and Hyperliquid Back Primary Market Rules

Paradigm and the Hyperliquid Policy Center said they broadly support the proposed rule, especially FinCEN’s decision to focus most issuer obligations on the primary market.

The primary market is where stablecoin issuers mint and redeem tokens directly with customers. In that setting, issuers can collect customer information, apply know-your-customer controls, monitor transactions, and block activity when required.

The groups said that approach reflects how stablecoin issuers actually interact with users. They argued that compliance duties are more practical when issuers have direct relationships with customers and visibility into the activity being reviewed.

Their concern is focused on the secondary market, where stablecoins move between wallets, exchanges, DeFi protocols, smart contracts, and other blockchain applications after issuance. In those environments, issuers may see wallet addresses and transaction amounts but not the identity or full context of each user.

DeFi Transfers Raise Liability Concerns

Paradigm and the Hyperliquid Policy Center warned that the proposed rule could treat smart-contract interactions as stablecoin services provided by issuers at every step of a transaction.

They said that interpretation could expose issuers to strict liability for transfers they cannot meaningfully police on public blockchains. Their letter argued that issuers do not control permissionless smart contracts and may not have the technical ability to stop certain secondary-market transactions once tokens are circulating.

The groups said such obligations could push U.S.-regulated stablecoin issuers away from DeFi and toward permissioned environments. They warned that this could reduce the use of regulated dollar-backed stablecoins in decentralized markets and leave more activity to offshore or non-dollar alternatives.

The letter recommended that OFAC reconsider how it treats smart-contract interactions. It also urged regulators to narrow the definition of “payment stablecoin-related activity” so that issuer obligations do not extend beyond areas where issuers have practical control.

The groups also asked that Suspicious Activity Report duties remain focused on the primary market. They said broader reporting requirements for secondary-market DeFi transfers could create obligations based on limited information.

GENIUS Act Implementation Enters Rulemaking Phase

The GENIUS Act is now in the implementation stage after Congress passed the stablecoin framework last year. The process requires agencies to propose rules, collect comments, revise language, and finalize compliance requirements before the law takes full effect.

The debate, as a result, reflects a wider question in U.S. crypto policy: how to apply financial crime controls to stablecoins without blocking their use on permissionless blockchain networks.

The Hyperliquid Policy Center was created in February with support from the Hyperliquid Foundation, which donated about $29 million worth of HYPE tokens. Jake Chervinsky serves as the group’s chief executive officer.

Paradigm, a major crypto venture capital firm and backer of Hyperliquid, joined the policy center in the letter. Both groups said the final rule should preserve compliance obligations where issuers can meet them while avoiding requirements that could make public blockchain use impractical.

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