Crypto venture capital firm Paradigm and Hyperliquid Policy Center issued a joint letter Tuesday urging the U.S. Treasury to alter a proposed anti-money laundering rule for stablecoin issuers. The organizations argue the rule would subject stablecoin issuers to strict liability for transactions they cannot meaningfully police. The Department of the Treasury's Financial Crimes Enforcement Network and Office of Foreign Assets Control jointly proposed the rule in April to implement provisions of the GENIUS Act related to treating stablecoin issuers like financial institutions under the Bank Secrecy Act.
Treasury Proposed Rule in April Under GENIUS Act
FinCEN and OFAC jointly proposed the rule in April to implement GENIUS Act provisions. The proposed rule treats stablecoin issuers like financial institutions for purposes of the Bank Secrecy Act. Congress passed the GENIUS Act last year in part due to President Donald Trump's administration supporting the digital assets industry. The legislation is currently in the implementation phase, which includes rules being proposed and then eventually agreed upon, before the stablecoin bill goes into full effect.
Paradigm and Hyperliquid Policy Center Oppose Secondary Market Liability
Hyperliquid Policy Center and Paradigm stated they broadly support the proposed rule and FinCEN's decision to tailor most issuer obligations to the primary market. The organizations wrote to recommend that certain secondary market obligations be clarified or narrowed to avoid unintended consequences for permissionless blockchain infrastructure and the DeFi ecosystem. They support FinCEN's approach of focusing compliance obligations on the primary market, where issuers know their customers, and taking a lighter approach in the secondary market, where issuers only see wallet addresses and transaction amounts.
HPC and Paradigm argue that OFAC's proposal to extend issuer liability to secondary market activity through smart contracts imposes unnecessarily strict liability for transactions issuers cannot control. The organizations stated that 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.
Organizations Recommend Narrowing Definition and Reconsidering Smart Contract Treatment
HPC and Paradigm made specific suggestions in their letter from Tuesday. The organizations recommend narrowing the definition of "payment stablecoin-related activity" and reconsidering OFAC's treatment of smart contract interactions. Hyperliquid Foundation created HPC in February with a donation of roughly $29 million worth of HYPE tokens. Jake Chervinsky acts as HPC's CEO. Paradigm is a backer of Hyperliquid.
FAQ
What did Paradigm and Hyperliquid Policy Center request from the U.S. Treasury on Tuesday?
Paradigm and Hyperliquid Policy Center issued a joint letter Tuesday urging the U.S. Treasury to alter a proposed anti-money laundering rule for stablecoin issuers. The organizations argue the rule would subject stablecoin issuers to strict liability for transactions they cannot meaningfully police in secondary markets.
When did FinCEN and OFAC propose the stablecoin anti-money laundering rule?
The Department of the Treasury's Financial Crimes Enforcement Network and Office of Foreign Assets Control jointly proposed the rule in April to implement provisions of the GENIUS Act related to treating stablecoin issuers like financial institutions under the Bank Secrecy Act.
What specific recommendations did the organizations make in their letter?
HPC and Paradigm recommended narrowing the definition of "payment stablecoin-related activity" and reconsidering OFAC's treatment of smart contract interactions. The organizations support focusing compliance obligations on the primary market while taking a lighter approach in the secondary market.
