Treasury Stablecoin Proposal Draws Major Warning From Hyperliquid Policy Center–Here’s Why

The Hyperliquid Policy Center (HPC), together with venture capital firm Paradigm, submitted a joint comment to the US Treasury on Tuesday, urging the Financial Crimes Enforcement Network (FinCEN) and the Office of Foreign Assets Control (OFAC) to refine parts of its proposed stablecoin compliance rule tied to the GENIUS Act. 

The rule is intended to implement anti-money laundering (AML) and sanctions requirements for “permitted payment stablecoin issuers” (PPSIs), a category the proposal says should be able to innovate in payment stablecoins while operating under an “appropriately tailored” regime designed to manage illicit-finance risk.

Narrower Compliance, Less Burden

While they did not oppose the overall goal of the framework, Paradigm and the Hyperliquid Policy Center argued that key elements of the proposal need clearer boundaries—especially where compliance obligations may unintentionally spill over into areas that do not fit the GENIUS Act’s structure or Congress’s intent.

A major focus of the comments is how permitted payment stablecoin issuers’ duties should work in the secondary market, where PPSIs do not have a direct relationship with the underlying counterparties. 

In their view, the law makes clear Congress expected due diligence by PPSIs on their own customers, but did not intend a requirement for PPSIs to conduct additional diligence for trading that occurs in the secondary market.

The firms drew an analogy to traditional banking, saying that once regulated institutions run KYC when funds enter the system, they are not expected to monitor every spending event after cash is withdrawn. 

In the same way, Paradigm and the Hyperliquid Policy Center argued that decentralized peer-to-peer transfers of stablecoins—and other digital assets—should generally involve KYC only at the regulated on-ramps and off-ramps, with compliance costs focused where the relationship exists. 

They warned that a contrary approach could drive requirements for PPSIs to file large numbers of low-value suspicious activity reports (SARs), creating “noisy” reports with false positives that would impose costs on both PPSIs and FinCEN without clear public benefit. 

Hyperliquid Policy Center Urges Clarification

The comment also addresses the way the proposed rule defines and assigns obligations related to “lawful orders.” Paradigm and the Hyperliquid Policy Center said the proposal defines “lawful order” by incorporating the GENIUS Act definition of “person,” which in turn determines who may have to build technological capabilities.

They argued that, as drafted, the proposed rule could be interpreted too broadly, potentially pulling in developers of distributed ledger protocols, decentralized self-custodial interfaces, and other technologies that Congress excluded from the GENIUS Act’s definition of a “digital asset service provider.” 

The firms said this result would not align with Congress’s intent, and they recommended a clarification in the final rule to explicitly state that certain entities and technologies are not included within the scope of lawful order requirements.

According to Paradigm and the Hyperliquid Policy Center, failing to make that clarification could unintentionally impose lawful order obligations on every validator on networks like Ethereum (ETH), Hyperliquid (HYPE), Solana (SOL), and Layer 2 systems that validate transactions involving PPSI-issued stablecoins. 

They argued the predictable outcome would be that US validator stakes would move offshore, US blockbuilding operations would relocate, and the US share of the chain validator base would decline—outcomes they said would undermine both the GENIUS Act’s onshoring objectives and broader US interests.

Featured image created with OpenArt; chart from TradingView.com