Paradigm and the Hyperliquid Policy Center filed a comment letter Tuesday to FinCEN and OFAC challenging proposed anti-money laundering and sanctions rules for stablecoin issuers under the GENIUS Act. The groups warned that making issuers responsible for secondary market activity could create a chilling effect that discourages deployment to permissionless blockchains and pulls U.S.-regulated stablecoins out of DeFi. The proposed rule implements AML and sanctions requirements for permitted payment stablecoin issuers as part of broader U.S. efforts to regulate dollar-backed digital tokens.
Paradigm and Hyperliquid Policy Center Distinguish Primary Issuance from Secondary Market Activity
The two groups argued in their letter that regulators should separate primary issuance, where issuers have direct customer relationships, from secondary market activity, where stablecoins move through wallets, decentralized finance apps, and validators outside an issuer's direct control. A wallet address that simply holds or transfers a stablecoin should not be treated as an issuer customer, the groups stated. Developers, protocol operators, and validators should also be protected from issuer-style obligations when they have no direct relationship with the issuer, they added.
Pparadigm and the Hyperliquid Policy Center argued that applying issuer-style rules to secondary market activity would add little value for regulators. Instead, it could generate an avalanche of noisy, false-positive-laden, low-value SARs, they wrote, referring to suspicious activity reports. The groups warned that such an approach could end up pulling U.S.-regulated stablecoins out of DeFi.
Industry Experts Assess Stablecoin Enforcement Challenges
Matthew Pinnock, COO at Altura DeFi, told Decrypt that 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. If stablecoins were to sit at the center of dollar-based digital finance, regulators need confidence that issuers can identify customers, block sanctioned actors, and cooperate with law enforcement when needed, Pinnock said.
Pinnock explained that such a degree of confidence could be difficult to achieve because issuers often have no direct relationship with users once stablecoins move between self-custodied wallets, comparing the setup to asking a bank to track every cash transaction after money leaves an ATM.
Siwon Huh, analyst at crypto research firm Four Pillars, told Decrypt that a broad secondary-market carveout could create enforcement gaps. Sanctioned entities such as North Korea already have a track record of using dollar stablecoins as a store of value and a means of moving money, Huh said, warning that if issuers bear no responsibility once a coin has been issued, their incentive to invest in blocking technology weakens.
Regulatory Uncertainty Affects Validators and Infrastructure Providers
Unclear rules are especially serious for validators because they could be read to cover infrastructure operators on networks such as Ethereum, Solana, and Hyperliquid, potentially pushing U.S.-based staking and infrastructure building offshore, according to the source article.
Marcos Viriato, CEO and co-founder of Parfin, told Decrypt that where this can go too far is if the rules blur the line between firms that control customer relationships and firms that only provide infrastructure. If obligations become too broad, firms may struggle to apply them consistently, he said, adding that effective rules should strengthen compliance without creating unnecessary operational complexity.
FAQ
What did Paradigm and the Hyperliquid Policy Center file on Tuesday?
Paradigm and the Hyperliquid Policy Center filed a comment letter Tuesday to FinCEN and OFAC challenging proposed anti-money laundering and sanctions rules for stablecoin issuers under the GENIUS Act.
Why are the groups concerned about the proposed stablecoin rules?
The groups warned that making issuers responsible for secondary market activity could create a chilling effect that discourages deployment to permissionless blockchains and could end up pulling U.S.-regulated stablecoins out of DeFi.
What distinction do Paradigm and the Hyperliquid Policy Center argue regulators should make?
The groups argued that regulators should separate primary issuance, where issuers have direct customer relationships, from secondary market activity, where stablecoins move through wallets, decentralized finance apps, and validators outside an issuer's direct control.
