Paradigm and Hyperliquid Policy Center Urge US Treasury to Ease Stablecoin AML Rules

Crypto venture capital firm Paradigm and the DeFi advocacy group Hyperliquid Policy Center (HPC) have jointly urged the U.S. Treasury Department to reconsider proposed anti-money laundering (AML) regulations for stablecoins, warning that overly broad rules could stifle decentralized finance (DeFi) innovation. In a letter reported by The Block, the two organizations argue that regulations introduced in April to implement the Stablecoin GENIUS Act would impose strict liability on issuers for secondary market transactions they cannot realistically control.

Background of the Proposed Rules

The proposed regulations from the Treasury’s Financial Crimes Enforcement Network (FinCEN) and Office of Foreign Assets Control (OFAC) aim to treat stablecoin issuers similarly to traditional financial institutions under the Bank Secrecy Act (BSA). While Paradigm and HPC agree that AML obligations should apply to primary market transactions—where customer identification is feasible—they argue that extending issuer responsibility to secondary market trades executed via smart contracts is impractical and would significantly hinder DeFi adoption.

Key Concerns from Paradigm and HPC

In their joint letter, Paradigm and HPC emphasized that stablecoin issuers lack the technical ability to monitor or control peer-to-peer transactions on decentralized platforms. Imposing strict liability for such activity, they argue, would force issuers to either restrict stablecoin functionality or exit the market entirely. The organizations also noted that the proposed rules could conflict with the principles of the GENIUS Act, which was designed to foster innovation while maintaining financial integrity.

Implications for the Crypto Industry

The debate highlights a growing tension between U.S. regulators and the crypto industry over how to apply traditional financial laws to decentralized technologies. If the Treasury adopts the strictest interpretation of the rules, stablecoin issuers may face legal risks for transactions they cannot prevent or detect, potentially driving innovation overseas. The outcome of this regulatory process will likely set a precedent for how other crypto assets are treated under U.S. law.

Conclusion

The Treasury Department has not yet responded publicly to the letter. As the comment period for the proposed rules continues, stakeholders across the crypto ecosystem are watching closely for any adjustments that could balance compliance with innovation. The final regulations, expected later this year, will shape the future of stablecoins and DeFi in the United States.

FAQs

Q1: What is the Stablecoin GENIUS Act?
A: The GENIUS Act is proposed U.S. legislation that aims to regulate stablecoin issuers, requiring them to maintain reserves, comply with AML rules, and register with federal authorities.

Q2: Why are Paradigm and HPC concerned about secondary market transactions?
A: They argue that stablecoin issuers cannot realistically monitor or control peer-to-peer trades on decentralized platforms, and imposing liability for such transactions could cripple DeFi innovation.

Q3: What happens next in the regulatory process?
A: The Treasury Department is reviewing public comments on the proposed rules. A final version is expected later this year, which could include modifications based on industry feedback.