Paradigm, Hyperliquid Policy Center urge Treasury to narrow $26B AML rule

Stablecoin issuers face potential liability for blockchain transactions they cannot control, and two crypto groups want the Treasury to draw a clearer line.

Paradigm and the Hyperliquid Policy Center on Tuesday urged the US Treasury to narrow a proposed anti-money laundering rule that would extend Bank Secrecy Act obligations to stablecoin issuers for secondary-market transactions on public blockchains. The joint letter, submitted on the final day of the public comment period, argues that requiring issuers to monitor peer-to-peer transfers they cannot control would create unmanageable compliance risk.

"An issuer facing obligations it cannot meet on the secondary market has a strong incentive to deploy only to permissioned environments, pulling US-regulated stablecoins out of DeFi and creating a void filled by unregulated, offshore, non-dollar alternatives," Jake Chervinsky, CEO of the Hyperliquid Policy Center, said in the letter co-signed by Paradigm.

The proposed rule, published April 10 by FinCEN and OFAC, implements the GENIUS Act signed into law July 18, 2025. It would classify permitted payment stablecoin issuers as financial institutions under the Bank Secrecy Act, requiring a five-pillar AML compliance program. The US spends roughly $26 billion annually on AML compliance across financial institutions, with less than 1 percent of criminal proceeds recovered, according to Coin Center, which submitted its own comments on the proposal in October 2025.

The Treasury's final rule will determine whether US-regulated stablecoins remain viable on permissionless blockchains or retreat to permissioned venues, potentially ceding DeFi liquidity to unregulated offshore alternatives. The comment period closed June 9, with the final rule expected in the coming months.

The primary-secondary market fault line

The dispute centers on where compliance obligations should end. In the primary market, stablecoin issuers interact directly with customers, conduct know-your-customer checks, and monitor transactions. On the secondary market, tokens move through wallets, decentralized exchanges, lending protocols, and smart contracts without the issuer acting as an intermediary.

Paradigm and the Hyperliquid Policy Center said they broadly support the rule and FinCEN's decision to tailor most issuer obligations to the primary market. Their objection focuses on OFAC's proposed treatment of smart contract interactions, which they argue could create strict liability for transactions issuers cannot meaningfully police.

Coin Center, in its October 20 comments, proposed an alternative framework using zero-knowledge proofs to enable compliance at issuance and redemption points without requiring surveillance of peer-to-peer transfers. The organization argued that forcing issuers to monitor every downstream transfer would create a pervasive surveillance environment with minimal crime-fighting benefit.

What's at stake for DeFi

Stablecoins are central to DeFi liquidity, collateral management, and settlement across public blockchains. If issuers determine that public-chain activity carries unmanageable compliance risk, they may restrict issuance and redemption to permissioned venues where counterparties can be identified more easily.

The Hyperliquid Policy Center was created in February with support from the Hyperliquid Foundation, which donated roughly $29 million worth of HYPE tokens. Paradigm is also a backer of Hyperliquid, making the letter both a policy filing and a direct intervention from firms with a strong interest in DeFi market structure.

The groups asked Treasury officials to narrow the definition of "payment stablecoin-related activity" and reconsider OFAC's treatment of smart contract interactions. The aim is to preserve primary-market compliance while avoiding rules that make issuers responsible for every downstream transfer of their tokens.

This article is for informational purposes only and does not constitute investment advice.