Paradigm, Hyperliquid Policy Center Push Back on GENIUS Act Stablecoin AML Rule

Crypto investment firm Paradigm and the Hyperliquid Policy Center warned U.S. regulators that proposed stablecoin anti-money laundering rules could push regulated dollar tokens away from permissionless DeFi if issuers are made responsible for secondary market activity.

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In a letter sent Tuesday to FinCEN and OFAC, the two industry groups challenged a proposed rule implementing the GENIUS Act’s anti-money laundering and sanctions requirements for permitted payment stablecoin issuers.

Such an approach could create a “chilling effect” that discourages issuers from deploying to permissionless blockchains, the groups wrote, warning it could end up “pulling U.S.-regulated stablecoins out of DeFi.”

The two argue 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 argued. Developers, protocol operators, and validators should also be protected from issuer-style obligations when they have “no direct relationship with the issuer,” they added.

Paradigm and the Hyperliquid Policy Center argue 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.

Keeping an eye on stablecoins

The question at issue is on how regulators could continue to police stablecoin use without turning just about every other part of the market into a regulated middleman.

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.

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.

But 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, Pinnock explained, comparing the setup to asking a bank to track “every cash transaction after money leaves an ATM.”

A broad secondary-market carveout could also create enforcement gaps, Siwon Huh, analyst at crypto research firm Four Pillars, told Decrypt.

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.”

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.

“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, Marcos Viriato, CEO and co-founder of Parfin, told Decrypt.

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.”