Hyperliquid advocate and Paradigm urge US to revise proposed anti-money laundering rule

Prolific crypto venture capital firm Paradigm and Hyperliquid Policy Center, a DeFi advocacy group, jointly issued a letter Tuesday urging the U.S. Treasury to alter a proposed anti-money laundering rule that they say would subject stablecoin issuers "to strict liability for transactions they cannot meaningfully police."

The Hyperliquid-backed lobby group and Paradigm, a backer of Hyperliquid, are seeking to prevent rules they say would limit decentralized stablecoin usage on public blockchains.

Back in April, the Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) and Office of Foreign Assets Control (OFAC) jointly proposed a rule to implement provisions of the GENIUS Act related to treating stablecoin issuers like financial institutions for purposes of the Bank Secrecy Act.

"We broadly support the proposed rule, and in particular FinCEN’s decision to tailor most issuer obligations to the primary market, but write to recommend that certain secondary market obligations be clarified or narrowed to avoid unintended consequences for permissionless blockchain infrastructure and the DeFi ecosystem," Hyperliquid Policy Center (HPC) and Paradigm said in their letter.

HPC and Paradigm said they support FinCEN's approach of focusing on compliance obligations on the primary market, where issuers know their customers, and take a lighter approach in the secondary market, where issuers only see wallet addresses and transaction amounts. "The same principle should guide the agencies’ implementation of AML and sanctions requirements for stablecoins deployed to permissionless environments," they said.

OFAC’s proposal to extend issuer liability to secondary market activity through smart contracts imposes unnecessarily strict liability for transactions issuers cannot control, HPC and Paradigm argue.

"An issuer facing obligations it cannot meet on the secondary market has a strong incentive to deploy only to permissioned environments, pulling U.S.-regulated stablecoins out of DeFi and creating a void filled by unregulated, offshore, non-dollar alternatives," they added. "It would undo the current regulatory spring and restore the brutal winter of the past administration."

Congress passed the GENIUS Act last year in part due to President Donald Trump's administration supporting the digital assets industry. Now, the legislation is in the implementation phase, which includes rules being proposed and then eventually agreed upon, before the stablecoin bill goes into full effect.

HPC and Paradigm made a series of specific suggestions in their letter from Tuesday, including narrowing "the definition of 'payment stablecoin-related activity'" and reconsidering "OFAC’s treatment of smart contract interactions." 

Hyperliquid Foundation helped create HPC in February with a donation of roughly $29 million worth of HYPE tokens. Jake Chervinsky acts as HPC's CEO.