Proposed AML rule could push U.S. stablecoins out of DeFi

On Tuesday, crypto investment firm Paradigm and the Hyperliquid Policy Center filed a formal comment with FinCEN and OFAC arguing that a proposed rule to implement the GENIUS Act’s anti-money-laundering and sanctions requirements could push U.S.-regulated stablecoins away from permissionless decentralized finance if secondary-market transfers are treated as issuer activity.

The filing targets a proposed requirement that would impose AML and sanctions obligations on permitted payment stablecoin issuers. The groups asked regulators to draw a clear line between primary issuance-where issuers have direct customer relationships-and secondary-market activity, where tokens circulate through self-custodied wallets, decentralized applications, validators and other infrastructure outside issuer control.

The comment says treating a wallet that “simply holds or transfers” a stablecoin as an issuer customer would be inappropriate. It warns that such a rule would impose issuer-style obligations on developers, protocol operators and validators that do not maintain direct relationships with issuers.

Paradigm and Hyperliquid argue applying issuer rules to routine secondary trading would add little enforcement value while creating large operational burdens. The filing cautions the policy could produce “an avalanche of noisy, false-positive-laden, low-value SARs”—referring to suspicious activity reports-and could deter issuers from deploying regulated dollar tokens on open blockchains.

Representatives for those who favor stricter issuer duties contend regulators need confidence that issuers can identify customers, block sanctioned actors and cooperate with law enforcement. Matthew Pinnock, chief operating officer at Altura DeFi, argued issuers often lose direct ties to users once coins move to self-custodied wallets and compared the expectation of issuer oversight to asking a bank to track every cash transaction after withdrawal.

Analysts raising enforcement concerns pointed to cases in which sanctioned actors used dollar stablecoins as a store of value and a means to move funds. Siwon Huh, an analyst at Four Pillars, warned that exempting secondary-market activity entirely could weaken issuers’ incentives to invest in technologies that block sanctioned actors and create enforcement gaps.

Infrastructure providers also flagged risks. Marcos Viriato, CEO and co-founder of Parfin, said unclear rule language could be read to cover validators and staking operators on networks such as Ethereum and Solana, which could encourage U.S.-based infrastructure and staking activity to relocate offshore.

In their filing, Paradigm and Hyperliquid recommended narrowly defining issuer responsibilities to primary issuance and known customer relationships, and excluding routine secondary-market holders, developers and operators from issuer-style compliance duties. The groups noted U.S.-regulated stablecoins currently support billions of dollars in daily trading, lending and settlement. Policymakers are weighing those market effects while considering how to prevent sanctions evasion and money laundering as digital dollar tokens grow in use.