Paradigm, Hyperliquid warn $26B AML rule could push stablecoins from DeFi

Paradigm and the Hyperliquid Policy Center jointly urged the U.S. Treasury on Tuesday to narrow proposed anti-money laundering rules under the GENIUS Act, warning the current language could push regulated stablecoins out of open DeFi networks.

"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," Jake Chervinsky, CEO of the Hyperliquid Policy Center, said in the letter.

The letter, sent to FinCEN and OFAC, targets a joint rule proposed April 10 that would classify permitted payment stablecoin issuers as financial institutions under the Bank Secrecy Act. The groups said they broadly support primary-market compliance — where issuers interact directly with customers — but object to extending those obligations to secondary-market transactions on public blockchains, where issuers cannot identify counterparties or stop transfers in real time.

The comment period closed June 9, meaning Treasury will now weigh whether to narrow the rule or keep its current scope. The outcome will determine whether U.S.-regulated stablecoins like USDC remain active across permissionless DeFi protocols or retreat to permissioned venues, potentially ceding market share to offshore alternatives.

The dispute centers on a fundamental design tension. In the primary market, stablecoin issuers conduct know-your-customer checks and monitor transactions directly. Once tokens circulate through wallets, decentralized exchanges, lending protocols, bridges, and smart contracts on public blockchains, the issuer loses visibility and control. The proposed rule would hold issuers liable for that downstream activity anyway.

Coin Center, the crypto policy nonprofit, submitted its own comments to Treasury on Oct. 20, 2025, arguing that forcing issuers to monitor peer-to-peer blockchain transfers would create a pervasive surveillance environment with minimal crime-fighting benefit. The group noted that the U.S. spends roughly $26 billion annually on AML compliance across financial institutions while recovering less than 1% of criminal proceeds. Coin Center instead advocated for privacy-preserving technologies such as zero-knowledge proofs to enable compliance at issuance and redemption points without stripping user anonymity during ordinary transactions.

The DeFi exposure risk

If FinCEN and OFAC adopt the rule as proposed, the market impact could be material. Stablecoins underpin liquidity, collateral management, trading pairs, and settlement across DeFi on Ethereum, Solana, and other public chains. Issuers facing unmanageable secondary-market liability may restrict token support to permissioned venues where counterparties can be identified, effectively splitting the stablecoin market into compliant and non-compliant pools.

"An issuer facing obligations it cannot meet on the secondary market has a strong incentive to deploy only to permissioned environments," Chervinsky said. The Hyperliquid Policy Center, created in February with roughly $29 million in HYPE token donations from the Hyperliquid Foundation, has a direct stake in preserving DeFi access for regulated stablecoins. Paradigm, also a backer of Hyperliquid, co-signed the letter.

What comes next

The GENIUS Act, signed into law July 18, 2025, created the first federal regulatory framework for payment stablecoins. The April 10 proposed rule from FinCEN and OFAC represents the implementation phase — where statutory language becomes operational compliance requirements. Treasury's final approach will determine whether stablecoin compliance is built around issuer-controlled entry points or extended deeper into public-chain activity.

For investors, the stakes are clear: a narrow rule preserves the utility of stablecoins as peer-to-peer payment tools across DeFi, while a broad rule could consolidate the market around a handful of well-capitalized issuers operating in permissioned environments. The choice will shape the competitive landscape for U.S. dollar-denominated stablecoins for years to come.

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