Paradigm, Hyperliquid Challenge GENIUS Act Stablecoin AML Rule

Crypto Industry Groups Warn Proposed Stablecoin Rules Could Harm DeFi

Washington D.C. – Two prominent crypto industry groups have cautioned U.S. regulators that proposed anti-money laundering rules for stablecoin issuers could inadvertently push regulated dollar tokens away from permissionless decentralized finance (DeFi) ecosystems. The concern stems from proposals that would hold issuers responsible for secondary market activity.

In a letter submitted Tuesday to the Financial Crimes Enforcement Network (FinCEN) and the Office of Foreign Assets Control (OFAC), Paradigm and the Hyperliquid Policy Center challenged a proposed rule designed to implement the GENIUS Act’s anti-money laundering and sanctions requirements for permitted payment stablecoin issuers.

“U.S.-regulated stablecoins power billions of dollars in daily trading, lending, and settlement,” the Hyperliquid Policy Center stated in a social media post accompanying the filing. “Our comment offers recommendations to preserve their critical role in onchain markets.”

The industry groups warned that such an approach could create a “chilling effect,” discouraging issuers from deploying stablecoins on permissionless blockchains. This, they argued, could ultimately lead to “pulling U.S.-regulated stablecoins out of DeFi.”

Paradigm and the Hyperliquid Policy Center advocate for a clear separation between primary issuance, where issuers have direct customer relationships, and secondary market activity. The latter involves stablecoins moving through wallets, DeFi applications, and validators beyond an issuer’s direct oversight.

They contend that a wallet address merely holding or transferring a stablecoin should not be considered an issuer’s customer. Similarly, developers, protocol operators, and validators should be exempt from issuer-style obligations if they lack a direct relationship with the issuer.

Applying issuer-level rules to secondary market transactions, the groups argued, would offer minimal benefit to regulators while potentially generating a significant volume of “noisy, false-positive-laden, low-value SARs” (suspicious activity reports).

The core of the regulatory challenge lies in finding ways to police stablecoin usage without transforming nearly every market participant into a regulated intermediary.

“Regulators are trying to make sure stablecoins do not become ‘a blind spot for sanctions enforcement and illicit finance’ as they grow as global payment rails,” Matthew Pinnock, COO at Altura DeFi, told Decrypt. He added that if stablecoins become central to dollar-based digital finance, regulators “need confidence that issuers can identify customers, block sanctioned actors, and cooperate with law enforcement.”

However, Pinnock noted that achieving such confidence is difficult, as issuers often lose direct contact with users once stablecoins move into self-custodied wallets. He likened this to asking a bank to track “every cash transaction after money leaves an ATM.”

Conversely, Siwon Huh, an analyst at crypto research firm Four Pillars, expressed concern that a broad carve-out for the secondary market could create enforcement gaps. Huh pointed to the “track record” of sanctioned entities, such as North Korea, in using dollar stablecoins as a “store of value and a means of moving money.” He warned that if issuers “bear no responsibility once a coin has been issued, their incentive to invest in blocking technology weakens.”

Ambiguous rules could also pose significant risks for validators. The proposed regulations, if broadly interpreted, could encompass infrastructure operators on networks like Ethereum, Solana, and Hyperliquid, potentially prompting U.S.-based staking and infrastructure development to move offshore.

“Where this can go too far is if the rules blur the line” between firms that manage customer relationships and those that merely provide infrastructure, Marcos Viriato, CEO and co-founder of Parfin, told Decrypt. He emphasized that overly broad obligations could make consistent application challenging, and that effective regulations should enhance compliance without introducing “unnecessary operational complexity.”