Preface

Summary: Crypto investment firm Paradigm and the Hyperliquid Policy Center submitted formal comments to U.S. regulators raising concerns about a proposed rule that would implement the GENIUS Act’s anti-money laundering (AML) and sanctions requirements for permitted payment stablecoin issuers. Their central argument is that treating secondary market activity — the movement of tokens among wallets, decentralized finance (DeFi) applications, and validators — as if it were direct issuer activity could unintentionally push regulated dollar-backed stablecoins away from permissionless blockchains. This article explains the groups’ objections, the regulatory context, and why the distinction between primary issuance and secondary market flows matters for market functioning and enforcement.

Lazy bag

Paradigm and Hyperliquid oppose making issuers responsible for secondary market transactions, arguing it could cause a chilling effect on deployment to permissionless DeFi. They urge regulators to preserve a clear divide between primary issuance (direct customer relationships) and secondary markets (onchain transfers outside issuer control), to avoid noisy compliance burdens and enforcement gaps while protecting infrastructure participants.

Main Body

The proposed rule implementing the GENIUS Act seeks to ensure that permitted payment stablecoin issuers meet AML and sanctions obligations similar to those required of other payment providers. Regulators aim to prevent stablecoins from becoming a blind spot for illicit finance or sanctions evasion as dollar-pegged tokens increasingly support trading, lending, and settlement. In response, Paradigm and the Hyperliquid Policy Center filed a joint comment to the Financial Crimes Enforcement Network (FinCEN) and the Office of Foreign Assets Control (OFAC) outlining concerns about the breadth of the proposal and its potential consequences for permissionless blockchains.

At the heart of the groups’ argument is a fundamental distinction: primary issuance refers to the relationship between an issuer and its direct customers at the point of minting or redemption, while secondary market activity covers the numerous onchain movements that occur after tokens enter circulation. Developers, validators, protocol operators, and self-custodied wallet holders typically have no contractual or onboarding relationship with the issuer once tokens are transferred into the broader ecosystem. Treating secondary activity as issuer activity, the groups contend, would expand issuer obligations to actors and transactions beyond their control.

Paradigm and Hyperliquid warned that labeling every wallet that holds or transfers a stablecoin as an issuer customer would be both impractical and unproductive. Issuers would be forced to monitor and report a far larger set of transactions, leading to compliance systems inundated with low-value alerts and false positives. Such an influx of suspicious activity reports (SARs) could overwhelm enforcement resources and dilute attention from genuinely suspicious behavior.

Industry observers echo parts of this concern. Firms that provide infrastructure — such as node operators, validators, and protocol developers — could find themselves exposed to issuer-style obligations despite lacking any direct relationship with end users. That prospect could discourage U.S.-based infrastructure development and staking operations if compliance requirements become ambiguous or onerous enough to favor offshore jurisdictions with clearer, more limited obligations.

Regulators, however, face a legitimate enforcement challenge: ensuring issuers can identify illicit actors and respond to sanctions risks where appropriate. Proponents of robust issuer obligations argue that stablecoin issuers must have the capability to block sanctioned addresses and cooperate with law enforcement to prevent tokens from being used for illicit finance. The tension arises because issuers’ ability to do so is inherently limited once tokens circulate freely across self-custodied wallets and permissionless protocols — analogous to expecting a bank to track every cash transaction after withdrawal from an ATM.

Critics of a broad secondary-market liability carveout caution that removing issuer responsibilities entirely could create enforcement gaps. Sanctioned actors have previously used dollar stablecoins as a store of value and a means to move funds. If issuers are absolved of responsibility once coins are issued, their incentive to invest in screening and transaction-blocking technologies may diminish, potentially weakening the overall AML and sanctions regime.

The commenters recommend a more calibrated approach: preserve clear lines between primary issuance and secondary market flows; exempt infrastructure providers and developers from issuer-specific obligations where there is no direct customer relationship; and tailor reporting requirements to avoid overwhelming SAR systems with low-value reports. Such measures aim to retain the compliance benefits of regulated stablecoins while protecting the open, permissionless nature of many blockchain ecosystems.

Operationally, a workable rule would allow issuers to focus compliance resources on onboarding, redemption processes, and other points where they have direct control and customer identification capability. At the same time, regulators could pursue targeted measures for illicit uses of stablecoins onchain — for example, focused investigations, enhanced sanctions screening for specific addresses, or cooperation with blockchain analytics providers to follow illicit flows — rather than blanket obligations that treat every onchain actor as an issuer customer.

From a market perspective, U.S.-regulated stablecoins play a central role in daily trading, lending, and settlement across many crypto markets. Policymakers must therefore strike a balance: provide sufficient tools for law enforcement and sanctions compliance without undermining the functional benefits of permissionless networks. Overbroad rules risk driving innovation and infrastructure development offshore, fracturing liquidity, and reducing the competitiveness of U.S.-based stablecoin offerings.

In sum, Paradigm and the Hyperliquid Policy Center urge regulators to adopt a precise, narrowly tailored framework that recognizes the practical limits of issuer control over secondary market activity, protects infrastructure participants from inappropriate obligations, and focuses compliance efforts where they are most effective. Achieving that balance will be critical to preserving the utility of regulated stablecoins as onchain money while maintaining robust safeguards against illicit finance.

Key Insights Table