Why Are Crypto Groups Challenging the Treasury Proposal?
Paradigm and the Hyperliquid Policy Center are urging the U.S. Treasury to narrow a proposed anti-money laundering rule that would apply Bank Secrecy Act and sanctions obligations to stablecoin issuers under the GENIUS Act.
In a letter sent Tuesday, the venture capital firm and the DeFi advocacy group argued that the proposal could expose stablecoin issuers to liability for secondary-market transactions that they cannot directly control. Their core concern is that stablecoin issuers may be held responsible for activity taking place through public blockchain smart contracts, even when those issuers do not know the users involved and cannot stop the transaction in real time.
The dispute centers on how far compliance obligations should extend once stablecoins leave the primary market. In the primary market, issuers interact directly with customers, can conduct know-your-customer checks, and can apply transaction monitoring controls. In the secondary market, stablecoins often move through wallets, decentralized exchanges, lending protocols, bridges, and smart contracts without the issuer acting as an intermediary.
That distinction is the main policy fault line. A rule designed for bank-like issuers could become harder to apply when tokens circulate across permissionless networks. For DeFi firms and investors, the question is whether stablecoins can remain widely usable on public blockchains while still fitting into a U.S. compliance framework.
What Is the Risk for Stablecoin Issuers?
FinCEN and OFAC jointly proposed the rule in April to implement parts of the GENIUS Act, which treats payment stablecoin issuers like financial institutions for anti-money laundering purposes. Paradigm and the Hyperliquid Policy Center said they broadly support the rule and FinCEN’s decision to tailor most issuer obligations to the primary market.
Their objection focuses on secondary-market obligations. They said those obligations should be clarified or narrowed to avoid unintended consequences for permissionless blockchain infrastructure and the DeFi ecosystem.
“We broadly support the proposed rule, and in particular FinCEN’s decision to tailor most issuer obligations to the primary market, but write to recommend that certain secondary market obligations be clarified or narrowed to avoid unintended consequences for permissionless blockchain infrastructure and the DeFi ecosystem,” the groups said in the letter.
The groups argued that the same principle should guide AML and sanctions rules for stablecoins used in permissionless environments. In their view, issuer compliance should be strongest where issuers have direct customer relationships and more limited where issuers only see wallet addresses and transaction amounts.
Investor Takeaway
The fight is not over whether stablecoin issuers should face AML rules. It is over where those rules should stop. If liability extends too far into secondary-market DeFi activity, U.S.-regulated issuers may reduce exposure to public blockchains.
How Could the Rule Affect DeFi Stablecoin Usage?
Paradigm and the Hyperliquid Policy Center warned that OFAC’s proposed treatment of smart contract interactions could create strict liability for transactions issuers cannot meaningfully police. That risk could reshape how U.S.-regulated stablecoins are deployed.
“An issuer facing obligations it cannot meet on the secondary market has a strong incentive to deploy only to permissioned environments, pulling U.S.-regulated stablecoins out of DeFi and creating a void filled by unregulated, offshore, non-dollar alternatives,” they said. “It would undo the current regulatory spring and restore the brutal winter of the past administration.”
The market impact could be material. Stablecoins are central to DeFi liquidity, collateral management, trading pairs, payments, and settlement across public blockchains. If issuers decide that public-chain activity carries unmanageable compliance risk, they may restrict issuance, redemption, or token support to permissioned venues where counterparties can be identified more easily.
That would create a different risk profile for exchanges, lending protocols, decentralized applications, and market makers. Liquidity could move toward less regulated offshore stablecoins, while U.S.-approved tokens could become more limited in DeFi use. For institutional users, the result would be cleaner compliance pathways but weaker access to open blockchain liquidity.
What Changes Are Paradigm and Hyperliquid Seeking?
The letter asks Treasury officials to narrow the definition of “payment stablecoin-related activity” and reconsider OFAC’s treatment of smart contract interactions. The aim is to preserve primary-market compliance while avoiding rules that make issuers responsible for every downstream transfer of their tokens.
The request comes as the GENIUS Act moves from legislation into implementation. That phase matters because the final rules will decide how stablecoin issuers operate in practice, not only how the statute reads. The industry is trying to lock in a framework that supports U.S.-regulated stablecoins without forcing them out of permissionless finance.
The Hyperliquid Policy Center was created in February with support from the Hyperliquid Foundation, which donated roughly $29 million worth of HYPE tokens. Jake Chervinsky serves as the group’s CEO. Paradigm is also a backer of Hyperliquid, making the letter both a policy filing and a direct intervention from firms with a strong interest in DeFi market structure.
The Treasury’s final approach will determine whether stablecoin compliance is built around issuer-controlled entry points or extended deeper into public-chain activity. For the market, the difference is significant: one path keeps U.S.-regulated stablecoins active in DeFi, while the other could push more liquidity toward permissioned systems or offshore alternatives.
