Paradigm and Hyperliquid Policy Center Challenge Treasury's Proposed Stablecoin AML Rules Under GENIUS Act

Paradigm and Hyperliquid Policy Center are challenging the U.S. Treasury's proposed stablecoin rules under the GENIUS Act. In a joint letter, they support AML compliance in the "primary market" but warn that holding issuers strictly liable for "secondary market" DeFi transactions they cannot control could push regulated stablecoins off open blockchains, creating a void for unregulated, offshore alternatives to fill.

Joint Challenge to Treasury Rules

• ▪The letter supports clearer rules for stablecoin issuers but warns that parts of the proposal could negatively affect decentralized finance (DeFi)
• ▪Paradigm and Hyperliquid Policy Center submitted a joint letter to FinCEN and OFAC challenging a proposed anti-money laundering rule for stablecoins
• ▪The proposed rule would establish anti-money laundering (AML) and sanctions compliance duties for permitted payment stablecoin issuers (PPSIs)

Primary vs. Secondary Market Distinction

• ▪They argue issuers should not be held responsible for the "secondary market," where stablecoins move between users in DeFi protocols without issuer involvement
• ▪The firms support focusing compliance on the "primary market," where issuers have direct customer relationships for issuance and redemption

Risks to DeFi and Stablecoin Adoption

• ▪This liability could incentivize issuers to avoid permissionless blockchains and deploy only in controlled, permissioned environments
• ▪The letter warns that OFAC's proposal could hold issuers strictly liable for secondary market transactions they cannot meaningfully control or police
• ▪Such a shift could reduce the use of regulated stablecoins in DeFi, creating a void for unregulated, offshore alternatives

Proposed Solutions and Recommendations

• ▪The firms recommend limiting reporting requirements like Suspicious Activity Reports (SARs) to the primary market
• ▪The letter asks regulators to recognize programmable compliance tools, such as smart contract-level blacklists, as valid methods

GENIUS Act and Regulatory Context

• ▪The Treasury's FinCEN and OFAC are currently creating detailed rules to implement the GENIUS Act
• ▪The GENIUS Act was signed into law in July 2025 to establish clear rules for stablecoins and their issuers in the U.S.