Paradigm Pushes Back on US Treasury Stablecoin AML Rule Over DeFi Reach

A formal push to narrow the US Treasury stablecoin AML rule landed at the U.S. Treasury on June 10, 2026, when Paradigm and the Hyperliquid Policy Center filed a joint comment letter asking federal regulators to limit the rule’s reach. Their message was clear: hold stablecoin issuers accountable where they actually have control, and stop there.

The letter targeted both FinCEN and the Office of Foreign Assets Control, or OFAC, the two agencies that proposed the rule in April. The proposal flows from the GENIUS Act, the stablecoin framework Congress passed and President Biden signed into law in July 2025. Now in the implementation phase, the law treats permitted payment stablecoin issuers as financial institutions under the Bank Secrecy Act, which brings serious compliance obligations.

Those obligations include customer monitoring, suspicious activity reporting, and blocking restricted transactions under sanctions rules. For stablecoin issuers that have long operated in largely permissionless environments, the burden is substantial. As a result, the central debate is not whether anti-money-laundering duties should exist, but how far the US Treasury stablecoin AML rule should extend.

Paradigm and Hyperliquid challenge the scope of the US Treasury stablecoin AML rule

Where the groups say issuer control actually exists

Paradigm and the Hyperliquid Policy Center are not opposing the rule outright. Instead, they said they broadly support FinCEN’s approach of centering most issuer obligations on the primary market, where issuers mint and redeem stablecoin tokens directly with customers.

In that setting, the compliance logic is straightforward. Issuers collect customer information, run know-your-customer checks, monitor transactions, and can block suspicious activity before it moves further. There is a direct relationship, and there is practical visibility. That is where the groups believe AML obligations belong.

The friction starts in the secondary market. Once stablecoins leave the primary market and move through wallets, exchanges, DeFi protocols, and smart contracts, the issuer’s visibility drops sharply. Issuers may see wallet addresses and transaction amounts, but they typically cannot see who is behind a transaction, why it is happening, or whether it involves a sanctioned party. Yet under a broad reading of the proposed rule, they could still be held responsible.

Why DeFi and smart contracts are the sticking point

The comment letter warned that the rule, as currently drafted, could treat smart-contract interactions as stablecoin services provided by issuers at every step of a transaction. That interpretation would expose issuers to strict liability for transfers happening on public blockchains over which they have no technical control.

This is not a theoretical concern. Permissionless smart contracts execute automatically, and there is no kill switch a stablecoin issuer can flip once tokens are in circulation. Requiring issuers to police every secondary-market interaction would mean holding them responsible for outcomes they cannot prevent. The groups described that approach as both impractical and legally unfair.

The letter also asked OFAC to reconsider how it treats smart-contract interactions under the rule. On the suspicious activity reporting side, Paradigm and the Hyperliquid Policy Center argued that SAR duties should stay focused on primary market activity, where issuers actually have the information needed to file a meaningful report. Extending SAR duties to secondary-market DeFi transfers, they said, would generate reporting based on incomplete data, which undermines the point of the requirement.

What the GENIUS Act changed for stablecoin issuers

A new compliance category under the Bank Secrecy Act

The GENIUS Act’s decision to classify stablecoin issuers as financial institutions is more than an administrative change. It pulls a sector that has largely operated outside traditional banking compliance into the Bank Secrecy Act framework, which was built for banks, money service businesses, and broker-dealers.

That framework comes with familiar expectations around customer identification, transaction monitoring, and government reporting. For issuers that primarily operate on-chain, meeting those expectations in full requires a major compliance buildout. More importantly, some of those expectations assume the kind of customer relationship and transaction visibility that only exists in the primary market.

The GENIUS Act was signed into law in July 2025, and the rulemaking process is still moving. Regulators are proposing rules, gathering comments, and revising language before any final version is set. That timing matters because the June 10 comment letter from Paradigm and the Hyperliquid Policy Center arrived while the language is still fluid.

Comments submitted during rulemaking can shape how agencies define key terms, draw jurisdictional lines, and set enforcement priorities. In their letter, the groups asked regulators to narrow the definition of “payment stablecoin-related activity” so issuer obligations do not extend beyond areas of practical control.

Why the DeFi stakes are higher than they look

The broader dispute goes well beyond paperwork. If U.S.-regulated stablecoin issuers face liability for every smart-contract interaction involving their tokens in secondary markets, the likely response may be to leave DeFi-compatible environments and move toward permissioned networks where controls are easier to enforce.

That outcome would matter. Dollar-backed stablecoins issued under U.S. regulatory frameworks sit at the center of DeFi liquidity. Pulling them away from permissionless protocols would not eliminate demand for stablecoin liquidity in those markets. Instead, it could shift demand toward offshore or non-dollar alternatives, which is the opposite of what U.S. financial regulators typically want.

That is the core argument in the Paradigm Hyperliquid stablecoin comments: overly broad AML obligations could reduce the presence of regulated dollar-backed stablecoins in decentralized markets instead of strengthening oversight.

The Hyperliquid Policy Center launched in February 2026 with backing from the Hyperliquid Foundation, which contributed approximately $29 million in HYPE tokens to fund the organization. Jake Chervinsky, a well-known figure in crypto legal and policy circles, serves as chief executive officer.

Paradigm, a major crypto venture capital firm and an early Hyperliquid backer, joined the policy center in the submission. Together, they bring venture capital, protocol-level interests, and dedicated policy infrastructure to a technical regulatory fight over the FinCEN OFAC stablecoin compliance framework.

• Focus AML and SAR obligations on primary market activity, where issuers have direct customer relationships and transaction visibility.
• Prevent the rule from treating smart-contract interactions in secondary markets as issuer-provided services.
• Ask OFAC to reconsider how those interactions are classified under the sanctions framework.
• Narrow the definition of “payment stablecoin-related activity” so it reflects where issuers genuinely operate.

Whether FinCEN and OFAC accept those requests will help decide whether the final rule becomes a workable compliance framework or a structural barrier to U.S.-regulated stablecoins inside DeFi.

FAQ

What is the GENIUS Act and how does it affect stablecoin issuers?

The GENIUS Act is a U.S. stablecoin regulatory framework signed into law in July 2025. It treats permitted payment stablecoin issuers as financial institutions under the Bank Secrecy Act, which subjects them to anti-money laundering obligations, customer monitoring requirements, and suspicious activity reporting duties.

Why do Paradigm and Hyperliquid want to narrow AML obligations to the primary market?

In the primary market, stablecoin issuers mint and redeem tokens directly with customers, so they have the information and control needed to meet compliance duties. In secondary markets, issuers have far less visibility into who is transacting and why, which makes broad obligations harder to carry out.

What concerns do Paradigm and Hyperliquid have about AML duties covering DeFi and secondary markets?

They warn that requiring issuers to monitor or report on secondary-market DeFi transactions could expose them to liability for activity on permissionless smart contracts they cannot control or stop. They also argue it could produce suspicious activity reports based on incomplete information, which would weaken the value of that reporting.

How could the proposed AML rule affect the use of stablecoins in decentralized finance?

If issuers face liability for all secondary-market smart-contract interactions, they may move away from DeFi-compatible environments and toward permissioned networks. That could reduce the availability of U.S.-regulated dollar-backed stablecoins in decentralized markets and push activity toward offshore or non-dollar alternatives.

What role do FinCEN and OFAC play in implementing the stablecoin AML rule?

FinCEN and OFAC jointly proposed the stablecoin AML rule in April as part of the GENIUS Act implementation process. FinCEN oversees the anti-money laundering framework, while OFAC handles sanctions compliance. The Paradigm and Hyperliquid Policy Center letter addressed both agencies directly.