Hyperliquid and Paradigm Push Back Against Proposed US AML Crypto Rules

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The Hyperliquid Policy Center (HPC) and crypto investment firm Paradigm have urged U.S. regulators to revise parts of a proposed rule implementing the GENIUS Act, arguing that certain anti-money laundering (AML) and sanctions requirements could inadvertently push regulated stablecoins away from decentralized finance (DeFi) platforms and public blockchains.

In a joint comment submitted to the U.S. Treasury Department, the organizations broadly supported the proposed framework issued by the Financial Crimes Enforcement Network (FinCEN) and the Office of Foreign Assets Control (OFAC). However, they warned that aspects of the proposal could extend compliance obligations beyond stablecoin issuers’ direct customers and into decentralized markets where issuers have limited visibility or control.

Debate Centers on Primary vs. Secondary Market Activity

The dispute focuses on how regulators should treat stablecoin transactions after tokens leave an issuer’s direct control. Under the proposed rule, permitted payment stablecoin issuers (PPSIs) would be treated as financial institutions for AML and sanctions compliance purposes. Treasury has stated that the framework is intended to balance innovation with safeguards against illicit finance.

HPC and Paradigm support FinCEN’s approach of concentrating most compliance requirements on what they describe as “primary market” activities, including:

• Stablecoin issuance
• Redemption of tokens
• Custody services
• Direct customer onboarding

According to the groups, these are areas where issuers maintain customer relationships and possess the information necessary to conduct due diligence and meet reporting obligations. The organizations argue that a different standard should apply to “secondary market” activity, including wallet-to-wallet transfers, decentralized exchange trades, and transactions occurring through smart contracts after tokens have entered circulation. While transaction data may be publicly visible through a Blockchain Explorer, issuers often lack access to the identity information needed to fulfill traditional AML and sanctions compliance requirements.

“Stablecoin issuers generally know little more than wallet addresses and transaction amounts in secondary markets,” the comment states, drawing comparisons to banks that conduct due diligence on account holders but are not responsible for monitoring every use of withdrawn cash.

Concerns Over OFAC’s Proposed Sanctions Framework

The strongest criticism in the filing is directed at OFAC’s sanctions proposal. According to HPC and Paradigm, the proposal could be interpreted as treating smart contract interactions as an ongoing service provided by the issuer, potentially exposing issuers to liability for transactions occurring between parties with whom they have no direct relationship.

The groups contend that such obligations would be difficult or impossible for issuers to satisfy on permissionless blockchain networks. They warned that if regulated issuers face compliance requirements they cannot realistically meet, they may choose to issue stablecoins only within permissioned environments, limiting their availability across DeFi applications and open blockchain ecosystems.

Recommendations Submitted to Treasury

The joint comment asks regulators to clarify several areas before finalizing the rule, including:

• Preserving FinCEN’s decision not to require suspicious activity reports (SARs) for secondary-market transactions.
• Confirming that developers, validators, decentralized exchanges, lending protocols, and self-custody interfaces are not subject to issuer compliance obligations.
• Recognizing smart contract-based compliance tools, such as transfer restrictions and address blocklists, as acceptable compliance mechanisms.
• Defining “customer relationship” in a way that excludes anonymous secondary-market wallet holders.
• Narrowing the definition of stablecoin-related activity subject to sanctions requirements.
• Providing clearer enforcement standards and penalty reductions for issuers operating robust sanctions compliance programs.

Broader Stakes for Stablecoin Regulation

The debate arrives as federal agencies continue implementing the GENIUS Act, which established the first comprehensive U.S. framework for payment stablecoins. The GENIUS Act stablecoin regulation framework requires issuers to maintain high-quality reserves, comply with AML rules, and operate under federal or approved state supervision.

Industry participants increasingly view the current rulemaking phase as critical in determining whether regulated dollar-backed stablecoins can operate broadly across decentralized networks or primarily within more controlled financial environments.

While Treasury has emphasized that the proposal is intended to address illicit-finance risks without hindering innovation, comments from industry groups suggest that the treatment of secondary-market activity remains one of the most closely watched issues in the rulemaking process.

FAQs

1. What is the GENIUS Act?
The GENIUS Act is a U.S. law establishing a federal regulatory framework for payment stablecoins, including reserve, licensing, AML, and sanctions compliance requirements.

2. What are HPC and Paradigm requesting?
They are asking Treasury to narrow compliance obligations tied to secondary-market stablecoin transactions and clarify that DeFi infrastructure participants are not regulated as issuers.

3. Why are DeFi advocates concerned?
They argue that imposing liability on issuers for transactions occurring on public blockchains could discourage regulated stablecoins from being used in decentralized applications.

4. Has the rule been finalized?
No. The FinCEN and OFAC proposal remains in the public-comment stage, and agencies are reviewing feedback before issuing final regulations.