Paradigm, Hyperliquid Urge Treasury to Avoid Crushing DeFi in GENIUS Act Rules

Hyperliquid Policy Center and Paradigm are warning U.S. regulators not to turn the GENIUS Act’s stablecoin rules into a compliance hammer that smashes DeFi along with the bad actors.

• Core dispute: AML and sanctions rules for stablecoin issuers
• Big concern: Don’t hold issuers liable for transactions they can’t control
• Market risk: Overreach could push liquidity into permissioned or offshore alternatives
• Broader stakes: Stablecoin policy is colliding with DeFi and developer protections

Hyperliquid Policy Center and Paradigm submitted a joint comment letter to the U.S. Treasury on June 9, pushing back on proposed anti-money laundering (AML) and sanctions rules tied to the GENIUS Act, the new federal framework for payment stablecoins. The draft guidance, first floated in April by FinCEN and the Office of Foreign Assets Control (OFAC), would require permitted stablecoin issuers to run AML programs and sanctions controls, including systems to block, freeze, or reject transactions that violate U.S. law.

On paper, that sounds like standard financial plumbing. In practice, it gets messy fast once tokens leave the issuer’s direct orbit. A stablecoin issuer can monitor minting and redemption, and it can police direct customer relationships. That’s the primary market — the point where a user buys or redeems the token directly from the issuer. But once the token is moving around wallets, decentralized exchanges, and smart contracts, we’re in the secondary market, where the issuer usually has no direct relationship with the user and no real ability to control the transaction.

That distinction is the whole ballgame.

Hyperliquid and Paradigm argue that Treasury should narrow the rule so it mainly covers primary-market activity, not downstream activity on permissionless blockchain networks. The groups say the same principle should guide the agencies’ implementation of AML and sanctions requirements. In their view, issuers should not be treated like omniscient gatekeepers for every transfer that happens after a token has already been issued.

“The same principle should guide the agencies’ implementation of AML and sanctions requirements,” the groups said.

“Issuers are subject to strict liability for transactions they cannot meaningfully police,” the letter said.

Strict liability here means being held responsible even when you can’t realistically stop or identify the activity in question. That is a hell of a standard for a stablecoin issuer to meet when the token is circulating through wallets, decentralized exchanges, and autonomous smart contracts on an open network. If Treasury expects issuers to track every hop forever, it’s not writing policy — it’s writing a compliance fantasy.

The groups’ warning is blunt: if the rules are too broad, regulated stablecoin issuers may retreat into permissioned systems that require identity checks and tighter controls. That would keep tokens inside closed rails and away from the open blockchain environments that made them useful in the first place. It could also push liquidity toward offshore alternatives that are less constrained and less interested in complying with U.S. policy preferences.

That’s not some abstract threat cooked up by crypto lobbyists. It’s the same basic market logic that drives people away from clunky, overregulated products and toward ones that actually work. If a U.S.-regulated stablecoin becomes too cumbersome for DeFi, users and protocols will look elsewhere. Capital has a nasty habit of flowing around roadblocks rather than politely sitting still.

At the same time, regulators are not pulling this concern out of thin air. Stablecoins are used for trading, settlement, remittances, and, yes, illicit finance. AML rules and sanctions controls exist for a reason. The problem is when those rules stop targeting actual abuse and start pretending that a token issuer can control every downstream transaction on a decentralized network. That’s not enforcement; that’s wishful thinking in a suit.

The difference between permissioned and permissionless systems matters here. Permissioned systems limit access to approved users, often with identity checks and centralized oversight. Permissionless systems are open to anyone who can use the network, which is the whole point of public blockchains and DeFi. If the implementation of the GENIUS Act nudges stablecoin issuers toward permissioned rails, it risks turning open finance into a walled garden with worse liquidity and more friction.

That would be a pretty ugly outcome for a technology marketed as programmable money.

The broader issue is not just stablecoin compliance. It’s whether U.S. crypto regulation can distinguish between entities that actually control funds and those that merely publish software or issue a token that later circulates through open networks. That question is also at the center of the CLARITY Act, a separate market-structure bill that includes protections for open-source developers and service providers that do not control customer funds.

More than 200 crypto companies and organizations have backed moving the CLARITY Act forward. The Senate Banking Committee advanced the bill in May, but the full Senate has not yet taken it up. Supporters, including Solana Institute CEO Kristin Smith, have argued that those developer protections matter if the U.S. wants innovation to stay onshore instead of getting buried under legal uncertainty and regulatory overreach.

The connection between the two fights is obvious. If policymakers blur the line between custodial intermediaries and non-custodial software, they risk treating code like a bank and developers like compliance officers for systems they do not control. That’s a great way to drive builders out of the U.S. and into friendlier jurisdictions. It’s also a fine way to make sure the next generation of blockchain infrastructure gets built somewhere else while Washington congratulates itself for “protecting consumers.”

There’s a legitimate policy challenge at the center of all this: how do you stop money laundering and sanctions evasion without crushing open, permissionless finance under rules designed for centralized institutions? The answer is not to wave away enforcement concerns. It’s to aim them at the parties that actually have control.

Stablecoin issuers should absolutely be expected to run compliance programs when they directly onboard customers, mint tokens, or redeem them. That’s the part they can control. But once those tokens are out in the wild — moving through wallets, DEXs, and smart contracts — the idea that issuers should be held responsible for every use is absurd on its face. It’s like expecting the maker of a prepaid phone to police every conversation forever.

For DeFi, the stakes are simple. If regulated stablecoins remain usable across open networks, they can continue to serve as the settlement layer that powers decentralized trading, lending, and payments. If they get boxed into closed, KYC-heavy systems, DeFi loses much of the liquidity that makes it work. The result would be a cleaner compliance box for regulators and a worse financial system for everyone else.

That’s the real choice lurking beneath the bureaucratic language: open stablecoin infrastructure that works in decentralized markets, or a neutered version trapped inside permissioned finance cosplay. The wrong rule here won’t stop the market. It’ll just export it.

What are Hyperliquid and Paradigm asking for?

They want the U.S. Treasury to narrow the GENIUS Act’s AML and sanctions rules so stablecoin issuers are not held responsible for DeFi transactions they cannot control or identify.

Why do they oppose the current draft?

Because it could impose bank-style duties on issuers for secondary-market activity such as wallet transfers, DEX trading, and smart contract interactions after a token has already been issued.

What is the difference between primary and secondary market activity?

Primary market activity is when a user mints or redeems stablecoins directly with the issuer. Secondary market activity is everything that happens after that, including peer-to-peer transfers, exchange trading, and DeFi usage.

Why does DeFi matter here?

DeFi depends on open, permissionless movement of assets. If stablecoin issuers are forced to police every downstream transaction, stablecoins become much less useful in decentralized markets.

What happens if the rule stays too broad?

Stablecoin issuers may restrict tokens to permissioned systems, and liquidity could migrate to offshore alternatives that are less compliant and less friendly to U.S. oversight.

How does the CLARITY Act connect to this?

It reflects the same broader fight over whether open-source developers and non-custodial service providers should be protected when they do not control customer funds.

What is the bigger regulatory question?

How to stop laundering and sanctions evasion without turning decentralized finance into a sanitized copy of traditional banking.