Paradigm and Hyperliquid Policy Center express concerns over AML regulations for stablecoin issuers, warning of potential negative impacts on DeFi.
Summary
- Paradigm and the Hyperliquid Policy Center have voiced concerns about proposed AML regulations impacting stablecoin issuers.
- The groups warn that classifying secondary market transactions as issuer activities could push regulated stablecoins away from DeFi.
- Experts indicate that vague regulations might lead to confusion for both issuers and infrastructure providers.
Paradigm, a cryptocurrency investment firm, along with the Hyperliquid Policy Center, has expressed significant concerns regarding proposed anti-money laundering (AML) regulations that could affect stablecoin issuers in the United States. They argue that if issuers are made responsible for secondary market transactions, it could discourage the use of regulated dollar-backed tokens in decentralized finance (DeFi).
In a letter submitted to the Financial Crimes Enforcement Network (FinCEN) and the Office of Foreign Assets Control (OFAC), the organizations criticized the proposed regulations tied to the GENIUS Act’s AML and sanctions requirements for approved stablecoin issuers.
We have submitted comments regarding the proposed regulations by the U.S. Treasury for stablecoin issuers. U.S.-regulated stablecoins facilitate billions in daily trading, lending, and settlement. Our comments provide recommendations to maintain their essential role in on-chain markets.
— Hyperliquid Policy Center (@HyperliquidPC)
They warned that such regulations could create a "chilling effect," potentially driving issuers away from engaging with permissionless blockchains and leading to a retreat of U.S.-regulated stablecoins from the DeFi ecosystem.
The organizations emphasized the need for regulators to differentiate between primary issuance, where issuers have direct relationships with customers, and secondary market transactions, where stablecoins are used beyond the issuer's control, such as in wallets and DeFi applications.
They argued that a wallet address merely holding or transferring a stablecoin should not be classified as a customer of the issuer, and that protocol operators and validators should not face issuer-level obligations without a direct relationship with the issuer.
Imposing issuer-like rules on secondary market activities, they contend, would yield minimal regulatory benefits and could increase the number of ineffective suspicious activity reports.
Monitoring Stablecoins
The challenge lies in how regulators can monitor stablecoin transactions without turning the market into a heavily regulated space. Regulators want to prevent stablecoins from being misused in illicit finance as their role as global payment mechanisms grows, according to Matthew Pinnock, COO of Altura DeFi.
For stablecoins to effectively operate within dollar-based digital finance, regulators need assurance that issuers can identify their customers and block sanctioned individuals. However, this may be difficult, as issuers typically do not have direct ties to users once stablecoins are transferred to self-custodied wallets. Pinnock compared this to requiring banks to monitor all cash transactions after withdrawals from ATMs.
Siwon Huh, an analyst at Four Pillars, cautioned that broad exemptions for secondary markets could create enforcement gaps, highlighting that sanctioned entities have previously exploited dollar stablecoins. He noted that if issuers are not held accountable after a coin is issued, they may lack motivation to invest in preventive measures.
Vague regulations pose particular challenges for validators, as they could be interpreted to include infrastructure operators on networks like Ethereum and Solana, potentially pushing U.S. staking and development overseas. Marcos Viriato, CEO of Parfin, warned that excessive regulations could blur the lines between customer-facing firms and those providing infrastructure, complicating compliance efforts without enhancing effectiveness.
