Stablecoin Rule Needs Refinement, Policy Center and VC Firm Argue
The Hyperliquid Policy Center (HPC) and venture capital firm Paradigm have jointly submitted comments to the U.S. Treasury, calling for revisions to a proposed stablecoin compliance rule linked to the GENIUS Act. The rule aims to establish anti-money laundering (AML) and sanctions requirements for “permitted payment stablecoin issuers” (PPSIs), a category intended to foster innovation in payment stablecoins while managing illicit finance risks.
Narrower Compliance, Less Burden
While not opposing the framework’s overarching goals, Paradigm and HPC contend that critical aspects of the proposal require clearer definitions. They are particularly concerned that compliance obligations could inadvertently extend beyond the scope and intent of the GENIUS Act.
A central point of contention is how PPSI duties should apply in the secondary market, where issuers lack direct relationships with counterparties. The firms argue that while Congress intended for PPSIs to conduct due diligence on their direct customers, it did not intend to mandate additional diligence for secondary market trading.
Drawing an analogy to traditional banking, Paradigm and HPC stated that regulated institutions, after performing Know Your Customer (KYC) checks upon fund entry, are not expected to monitor every subsequent transaction after cash withdrawal. Similarly, they believe that decentralized peer-to-peer stablecoin transfers, and other digital assets, should primarily require KYC at regulated on-ramps and off-ramps, with compliance efforts focused where direct relationships exist.
The organizations warned that an alternative approach could compel PPSIs to file a high volume of low-value suspicious activity reports (SARs). This, they cautioned, would generate “noisy” reports with false positives, increasing costs for both PPSIs and the Financial Crimes Enforcement Network (FinCEN) without clear public benefit.
Hyperliquid Policy Center Urges Clarification
The submitted comments also address the proposed rule’s definition and assignment of obligations related to “lawful orders.” Paradigm and HPC noted that the proposal defines “lawful order” by referencing the GENIUS Act’s definition of “person,” which in turn dictates who might be required to develop technological capabilities.
They argued that the current draft could be interpreted too broadly, potentially encompassing developers of distributed ledger protocols, decentralized self-custodial interfaces, and other technologies that Congress explicitly excluded from the GENIUS Act’s definition of a “digital asset service provider.”
The firms asserted that this outcome would contradict congressional intent and recommended a clarification in the final rule to explicitly exempt certain entities and technologies from lawful order requirements.
Failing to provide such clarity, according to Paradigm and HPC, could unintentionally impose lawful order obligations on every validator on networks like Ethereum, Hyperliquid, Solana, and various Layer 2 systems that process transactions involving PPSI-issued stablecoins. They predicted that this could lead to U.S. validator stakes moving offshore, the relocation of U.S. blockbuilding operations, and a decline in the U.S. share of the validator base, undermining both the GENIUS Act’s onshoring objectives and broader U.S. interests.
Leave a Reply