Key Takeaways:
Paradigm and the Hyperliquid Policy Center warned that a proposed anti-money laundering rule under the GENIUS Act could overreach into decentralized finance, potentially pushing regulated stablecoins away from open blockchain networks.
Paradigm and the Hyperliquid Policy Center on Monday urged the US Treasury to revise a proposed anti-money laundering rule, warning that provisions under the GENIUS Act could extend compliance liability to DeFi protocols and infrastructure builders beyond what the statute intended.
"The proposed rule could treat smart contract interactions in DeFi as if stablecoin issuers were still providing a service at every step of a transaction," the firms wrote in a joint letter to the Financial Crimes Enforcement Network and the Office of Foreign Assets Control, arguing that issuers would face "strict liability for transactions they cannot meaningfully police."
The rule, proposed by FinCEN and OFAC on April 1, sets anti-money laundering and sanctions compliance duties for Permitted Payment Stablecoin Issuers under the GENIUS Act, which President Donald Trump signed into law in July 2025. It separates stablecoin activity into a primary market — where issuers handle customer deposits and redemptions directly — and a secondary market, where stablecoins move between users through wallets, exchanges or DeFi protocols without issuer involvement. The firms said FinCEN's focus on the primary market is reasonable but warned that OFAC's treatment of secondary market activity could hold issuers responsible for peer-to-peer transfers they cannot control, cannot see clearly and cannot realistically stop.
If enforced too strictly, the firms argued, stablecoin issuers may avoid deploying on open blockchain networks and instead move to permissioned systems, ceding ground to unregulated offshore alternatives. The Treasury's 60-day comment period is underway, with industry stakeholders racing to shape the final rule before it takes effect alongside the GENIUS Act.
The letter identified three core risks. First, the proposed rule could extend compliance responsibilities to developers, validators and other infrastructure builders not covered under the GENIUS Act, potentially slowing innovation in the US crypto sector. Second, the definition of "payment stablecoin-related activity" could be interpreted broadly enough to treat secondary wallet users as direct customers of issuers. Third, the firms warned that smart contract compliance tools like blacklist features may not be recognized as valid methods under the current framework.
Paradigm and Hyperliquid recommended keeping Suspicious Activity Report requirements limited to the primary market, where issuers know their customers and can run checks. They called for clearer safe harbor protections for DeFi developers and decentralized protocols, including lending and trading platforms. The firms also urged regulators to narrow how "payment stablecoin-related activity" is defined and to ensure enforcement rules match the technical reality of blockchain systems, where no single party controls all activity.
The New York State Department of Financial Services on Tuesday proposed its own regulation to align state stablecoin rules with the GENIUS Act, adding provisions on reserve custody limits and risk management programs. A 60-day comment period on that proposal will begin when it is published in the state register.
The GENIUS Act gives stablecoins legal legitimacy under a 1:1 reserve backing requirement and dual charter options through state or federal regulators. The Treasury's proposed rule is the first step in implementing that framework, and the outcome of the comment period will determine how much of the DeFi ecosystem remains accessible to regulated stablecoin issuers.
This article is for informational purposes only and does not constitute investment advice.
