A coalition of crypto policy advocates has asked the U.S. Treasury to narrow a proposed AML and sanctions framework for stablecoin issuers under the GENIUS Act, warning that broad secondary-market obligations could disrupt permissionless blockchain infrastructures and the broader DeFi ecosystem. The Hyperliquid Policy Center (HPC) and venture firm Paradigm filed their joint comment this week, urging regulators to focus compliance on the primary market while taking a limited approach to secondary activity.
In their submission, the groups support FinCEN’s logic of concentrating obligations on issuers that hold customer information in the primary market, and applying a more restrained scope to secondary-market activity where issuers would only see wallets and transactions. They argued that the same principle should guide AML and sanctions requirements for stablecoins operating in permissionless environments, where visibility into end-users is inherently limited.
According to Cointelegraph, the Treasury’s April proposed rule aims to implement GENIUS Act provisions by requiring stablecoin issuers to have the capability to block, freeze or reject transactions that violate U.S. law or sanctions on both the primary and secondary markets. The HPC-Paradigm letter frames this as a potential overreach that could expand an issuer’s compliance perimeter beyond what is feasible or fair in a permissionless setting.
The authors contend that the proposed rule would sweep secondary-market activity into an issuer’s enforceable domain, a territory they say issuers cannot meaningfully police. They also warn that treating smart contract interactions as sanctionable activity—regardless of issuer relationships or visibility into the transacting parties—could create a chilling effect on open, programmable money and incentivize issuers to migrate away from open networks toward permissioned environments.
If such a shift were to occur, the groups warned, US-regulated stablecoins could retreat from decentralized finance, leaving a void filled by unregulated offshore or non-dollar alternatives. The argument reflects broader concerns among open-architecture advocates that heavy-handed compliance obligations in the secondary market would erode the openness of DeFi protocols.
Key takeaways
- The HPC-Paradigm coalition urges the Treasury to tailor GENIUS Act AML/sanctions rules to emphasize primary-market obligations for issuers, with a limited role for secondary-market enforcement.
- Proponents warn that sweeping secondary-market coverage would be difficult for issuers to police in permissionless networks and could penalize smart contract interactions without issuer visibility.
- There is concern that aggressive secondary-market rules could push stablecoins toward permissioned environments, undermining DeFi and potentially creating non-dollar or offshore alternatives.
- The GENIUS Act was signed into law last year, with implementation expected by January 2027; regulators and lawmakers are still refining related rules, including ongoing CLARITY Act discussions in the Senate.
Regulatory context and the path forward
The letter from HPC and Paradigm sits within a broader regulatory discourse on how to regulate stablecoins, open networks, and DeFi without compromising financial integrity or innovation. The GENIUS Act directs stablecoin governance and enforcement considerations, while federal agencies map granular implementations across primary and secondary markets. In parallel, a larger crypto policy debate is unfolding in Congress around the CLARITY Act, which would address platform-liability for developers and potentially set boundaries on money-laundering and sanctions enforcement for open-architecture protocols. Some lawmakers are pressing for a Senate vote on the CLARITY Act before the next elections, signaling that policy alignment remains unsettled as timelines approach the January 2027 milestone.
From a regulatory perspective, the debate underscores a tension between robust enforcement capabilities and preserving the open, permissionless nature of digital assets. Institutions and regulated entities—exchanges, banks, and other market participants—are watching how regulators translate GENIUS Act provisions into concrete, risk-based requirements. The debate also touches on wider questions about licensing, supervisory oversight, and the balance between on-chain transparency and the practical limits of identifying end-users in permissionless ecosystems.
For policymakers, the central issue is how to deter illicit finance and sanctions evasion without undermining innovation or driving activity into opaque or offshore channels. For regulated firms, the key concern is ensuring that compliance obligations are clear, proportionate, and enforceable in a way that aligns with existing AML/KYC frameworks and cross-border regulatory differences. The GenIUS Act and related proposals thus sit at the intersection of enforcement risk, open financial infrastructure, and the evolving architecture of digital assets.
Closing perspective
As the regulatory process unfolds, observers should monitor how the Treasury and federal agencies calibrate primary versus secondary-market obligations for stablecoins, and how that calibration might affect the openness of DeFi and the competitiveness of US-regulated issuers. The coming months are likely to reveal amendments aimed at balancing enforcement with the preservation of open, interoperable blockchain ecosystems.
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