The Hyperliquid Policy Center and prominent crypto venture firm Paradigm have formally petitioned the US Department of the Treasury to narrow the scope of its proposed anti-money laundering (AML) and sanctions rules for stablecoin issuers. In a joint comment letter submitted on June 9, the organizations warned that the government’s sweeping approach could inadvertently devastate the decentralized finance (DeFi) ecosystem by enforcing mandates that are technologically impossible to meet.
The pushback targets a regulatory framework proposed in April by the Financial Crimes Enforcement Network (FinCEN) and the Office of Foreign Assets Control (OFAC). The draft rules aim to implement the operational mandates of the GENIUS Act, a landmark federal framework for payment stablecoins that became law in July 2025. Under the current proposal, permitted stablecoin issuers would be required to maintain bank-style compliance programs capable of freezing, blocking, or rejecting transactions that violate US law across all stages of a token’s lifecycle.
Primary vs. Secondary Market Dilemma
Hyperliquid and Paradigm argue that while strict compliance controls make sense at the primary market level—where issuers interact directly with known customers during token minting and redemption, extending these same liabilities to the secondary market is structurally flawed.
Once a stablecoin enters open blockchain networks, it circulates through self-custodial software wallets, decentralized exchanges (DEXs), and automated smart contracts. In these environments, issuers have no direct relationship with users and can typically view only pseudonymous wallet addresses and transaction values.
“Issuers are subject to strict liability for transactions they cannot meaningfully police,” the joint letter stated, emphasizing that companies cannot legally or technically identify every participant in a multi-step DeFi transaction.
Threat of Fragmented Liquidity and Offshore Flight
The policy advocates warned that if the Treasury retains this strict liability model, the compliance burden will force regulated dollar-backed stablecoin issuers to completely rethink their network compatibility. Rather than risking federal penalties for unpoliced secondary transactions, issuers may respond by restricting their tokens entirely to permissioned, closed-loop ledger networks where every single participant has undergone identity verification.
Such a defensive shift would effectively cut off decentralized applications from heavily audited, compliant liquidity pools. The letter stresses that isolating regulated stablecoins from open-source protocols will not eliminate user demand; instead, it will simply cede the DeFi landscape to offshore, unregulated alternatives that operate completely outside the purview of US authorities.
Parallel Tension Surrounding the CLARITY Act
The regulatory tug-of-war occurs as Capitol Hill grapples with its own crypto legislative priorities. Lawmakers are actively debating the CLARITY Act, a Senate proposal designed to establish clean regulatory boundaries while offering explicit legal safe harbors for open-source developers and non-custodial service providers who do not control customer funds.
The digital asset industry has mounted a massive defense for these developer protections. More than 200 crypto firms and advocacy organizations have backed the initiative, with Solana Institute CEO Kristin Smith recently urging senators to preserve defensive software clauses. While the Senate Banking Committee successfully advanced the CLARITY Act in May, a full Senate vote remains pending as lawmakers continue to clash over anti-money laundering safeguards, yield-bearing stablecoins, and decentralized software liabilities.
The finalized Treasury rules for the GENIUS Act will ultimately define how smoothly regulated fiat-backed tokens can bridge the gap between traditional banking frameworks and permissionless blockchain networks.
