Key Highlights
- Paradigm and Hyperliquid support stablecoin rules but warn that parts of the proposal could affect DeFi if they are too strict.
- They argue regulators should focus on the “primary market” and not hold issuers responsible for DeFi or peer-to-peer transfers they cannot control.
- They warn that overly strict rules could push stablecoins away from open blockchain networks.
Paradigm, a digital asset investment firm, and Hyperliquid Policy Center (HPC) today submitted a joint letter to the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) and the Office of Foreign Assets Control (OFAC) regarding a proposed rule under the GENIUS Act.
In the letter, both firms said they support the idea of clearer rules for stablecoin issuers and efforts to fight money laundering and sanctions abuse. However, they warned that parts of the proposal could go too far and affect decentralized finance (DeFi) systems if not handled carefully.
What the proposal is about
The proposed rule would set anti-money laundering (AML) and sanctions compliance duties for permitted payment stablecoin issuers (PPSIs). It separates stablecoin activity into two main areas:
- The first is the “primary market,” where issuers directly issue stablecoins, handle customer deposits, process redemptions, and maintain a direct relationship with users.
- The second is the “secondary market,” where stablecoins move between users through wallets, exchanges, or DeFi protocols without the issuer being involved.
Paradigm and Hyperliquid said FinCEN’s approach is reasonable because it focuses most compliance duties on the primary market. In that part of the system, issuers know who their customers are and can run checks. They compared this to traditional banking, where banks check customers when accounts are opened, but do not track every way money is spent after it leaves the account.
OFAC concerns over secondary market activity
Moreover, the letter raised concerns about how OFAC treats secondary market activity. The firms said the draft rule could treat smart contract interactions in DeFi as if stablecoin issuers were still providing a service at every step of a transaction. This would mean issuers could be held responsible for transfers they do not control, cannot see clearly, and cannot realistically stop.
They warn that this creates a serious problem because blockchain systems are built in a way that no single party controls all activity. Most secondary transactions happen automatically through code, and issuers often only see wallet addresses and transaction amounts, not real identities.
“Issuers are subject to strict liability for transactions they cannot meaningfully police,” one line in the filing says. In simple terms, the concern is that responsibility could stretch beyond what is technically possible in permissionless blockchain systems.
Risk to DeFi and stablecoin adoption
The firms argued that if this approach is enforced too strictly, stablecoin issuers may avoid deploying on open blockchain networks and instead move to permissioned systems where activity is more controlled.
They said this could reduce the use of regulated stablecoins in DeFi and leave space for unregulated offshore alternatives to grow. It could also weaken the open structure that currently supports many crypto markets.
Another major concern in the letter is that the proposed rule could unintentionally extend compliance responsibilities to developers, validators, and other infrastructure builders. The firms argued these groups are not covered under the GENIUS Act, and adding them to compliance duties could slow down innovation and discourage development in the U.S. crypto sector.
Both firms proposed fixes
To address these issues, Paradigm and Hyperliquid recommended keeping reporting requirements like Suspicious Activity Reports (SARs) limited to the primary market. They also call for clearer safe harbor protections for DeFi developers and decentralized protocols, including lending and trading platforms.
They urged regulators to recognize smart contract tools like blacklist features as valid compliance methods and to clearly define “customer relationships” so that secondary wallet users are not treated as direct customers of issuers.
The firms also urged regulators to narrow how “payment stablecoin-related activity” is defined and to ensure that enforcement rules match the technical reality of blockchain systems, where issuers do not control peer-to-peer transactions. Moreover, they called for clearer standards for sanctions compliance so that issuers who follow the required steps are not unfairly punished for events beyond their control.
Why it matters
The GENIUS Act, signed into law in July 2025 by President Donald Trump, was a major step in setting clear crypto rules in the U.S., especially for stablecoins, and limits issuance to approved firms known as Permitted Payment Stablecoin Issuers (PPSIs), which are regulated under federal or state authorities depending on their size and structure.
This connects directly to the current debate because FinCEN and OFAC are now building detailed rules to implement that law.
The letter from Paradigm and Hyperliquid focuses on how those rules should be applied in real life, especially when stablecoins move into decentralized finance (DeFi).
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