Hyperliquid and Paradigm challenge Treasury's stablecoin AML rules
In brief
- Hyperliquid and Paradigm oppose Treasury's GENIUS Act secondary market compliance rules for stablecoin issuers
- The firms warn regulated stablecoins could be forced from DeFi into permissioned environments
- GENIUS Act takes effect January 2027; Senate also debates CLARITY Act stablecoin framework
The Compliance Perimeter Problem
Hyperliquid and Paradigm said in a letter on Tuesday that the Treasury's proposal sweeps secondary market activity into an issuer's compliance perimeter that they "cannot meaningfully police." The complaint centers on the April rule the Treasury proposed to implement GENIUS Act provisions requiring stablecoin issuers to have the capability to block, freeze or reject transactions that violate US law or sanctions on both primary and secondary markets.
The pair argued the proposal treats smart contract interactions as an activity that carries sanctions liability "regardless of whether the issuer has any relationship with, or visibility into, the transacting parties." This creates an impossible standard. An issuer can control what happens on primary issuance. It cannot meaningfully monitor or police how its token moves across decentralized exchanges, liquidity pools, or peer-to-peer trades once issued.
The DeFi Exit Risk
Hyperliquid and Paradigm warned that an issuer facing these obligations would be incentivized to only deploy into a permissioned environment, which would see US-regulated stablecoins pulled out of decentralized finance. The implication is stark: regulatory overreach designed to prevent money laundering could instead eliminate the very stablecoins policymakers want to see succeed in crypto.
US President Donald Trump signed the GENIUS Act into law last year, which outlined how stablecoins and their issuers are to be regulated. Federal agencies are currently looking at how to implement the law, which is set to go into effect in January 2027 at the latest.
What's Next
The Senate is currently debating a crypto bill that could include further rules for stablecoin issuers and remove liability for developers of crypto platforms regarding money laundering and sanctions compliance. The proposed legislation is dubbed the CLARITY Act, with provisions still under discussion and some lawmakers pushing for a full Senate vote before the November elections. The outcome of both efforts will shape how stablecoin issuers navigate the next two years.
