A joint letter from the Hyperliquid Policy Center (HPC) and investment firm Paradigm has been submitted to the U.S. Treasury, urging a revision of proposed anti-money laundering (AML) rules. The core of their argument is that the proposed regulations, which aim to treat stablecoin issuers similarly to traditional financial institutions, impose a “strict liability” on issuers for transactions beyond their control, particularly in the secondary market.
This submission highlights growing concerns within the digital asset industry regarding the practical application of AML and sanctions compliance for decentralized financial instruments. The industry players argue that the current proposal could inadvertently stifle innovation and push regulated stablecoins out of decentralized finance (DeFi) ecosystems.
Key Takeaways
- Stablecoin issuers are being targeted by a proposed U.S. Treasury rule that would place significant AML and sanctions compliance obligations on them.
- Hyperliquid Policy Center and Paradigm argue the proposed rule imposes “strict liability” on issuers for secondary market transactions, which they cannot effectively police.
- The proposed rule, stemming from the GENIUS Act, aims to integrate stablecoin issuers into the Bank Secrecy Act framework.
- Industry advocates fear that overly burdensome secondary market regulations could incentivize issuers to restrict stablecoin usage to permissioned environments, potentially driving out decentralized alternatives.
- Specific recommendations include narrowing the definition of “payment stablecoin-related activity” and re-evaluating the treatment of smart contract interactions by OFAC.
The proposed rule, jointly put forth by the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) and the Office of Foreign Assets Control (OFAC) in April, seeks to implement provisions of the GENIUS Act. This legislation mandates that stablecoin issuers be treated as financial institutions under the Bank Secrecy Act, necessitating robust compliance programs to prevent illicit finance. While HPC and Paradigm broadly support the initiative to focus compliance on the primary market—where issuers interact directly with customers—they strongly object to the extension of these obligations to the secondary market.
In the secondary market, stablecoin issuers typically only have visibility into wallet addresses and transaction amounts, lacking the direct customer relationships that facilitate traditional AML checks. HPC and Paradigm contend that imposing strict liability on issuers for transactions executed via smart contracts in permissionless environments is impractical and overly punitive. They warn that such a framework would create a strong disincentive for issuers to deploy stablecoins on public blockchains, potentially leading to the withdrawal of U.S.-regulated stablecoins from DeFi.
The potential consequence, as outlined in the letter, is a market vacuum that could be filled by unregulated, offshore stablecoin alternatives, undermining the stated goals of the regulations and potentially increasing systemic risk. The advocates suggest that this could reverse the progress made in bringing digital assets under a clearer regulatory framework, reminiscent of less favorable periods for the industry.
The genesis of this regulatory push lies in the GENIUS Act, passed last year, which was partly influenced by a previous administration’s supportive stance toward the digital asset sector. The current phase involves translating legislative intent into actionable rules, a process that includes public comment periods and subsequent rule finalization.
To address these concerns, HPC and Paradigm have put forth concrete suggestions. These include a more precise definition of “payment stablecoin-related activity” to avoid overreach and a reconsideration of how OFAC’s sanctions requirements are applied to smart contract interactions. These proposals aim to strike a balance between regulatory oversight and the operational realities of decentralized technologies.
The Hyperliquid Policy Center was established in February with significant backing from the Hyperliquid Foundation, which provided approximately $29 million worth of HYPE tokens. Jake Chervinsky serves as the CEO of HPC, indicating a focused effort on policy and advocacy within the digital asset space.
Potential Regulatory Precedent and Global Impact
The U.S. Treasury’s approach to stablecoin AML and sanctions compliance, particularly concerning secondary market activity, could set a significant precedent for other jurisdictions. Many countries are currently developing their own regulatory frameworks for digital assets, with stablecoins often being a focal point due to their potential for widespread adoption and systemic importance. The European Union’s Markets in a New Financial Innovation Strategy (MiCA) provides a comprehensive regulatory regime, but specific AML/sanctions obligations for stablecoin issuers in secondary markets may differ. If the U.S. adopts a strict liability approach for secondary market transactions, it could influence international standards, potentially leading to a global trend of imposing greater responsibility on issuers for network-level activities, even those they cannot directly control. This could further complicate global expansion for stablecoin projects and may encourage a move towards more controlled, permissioned blockchain environments worldwide, impacting the very nature of decentralized finance.
Details can be found on the website : www.theblock.co