Treasury Stablecoin Proposal Draws Major Warning From Hyperliquid Policy Center–Here’s Why
The Hyperliquid Policy Center (HPC), along with enterprise capital agency Paradigm, submitted a joint remark to the US Treasury on Tuesday, urging the Financial Crimes Enforcement Network (FinCEN) and the Office of Foreign Assets Control (OFAC) to refine components of its proposed stablecoin compliance rule tied to the GENIUS Act.
The rule is meant to implement anti-money laundering (AML) and sanctions necessities for “permitted fee stablecoin issuers” (PPSIs), a class the proposal says ought to have the ability to innovate in fee stablecoins whereas working below an “appropriately tailor-made” regime designed to handle illicit-finance danger.
Narrower Compliance, Less Burden
While they didn’t oppose the general purpose of the framework, Paradigm and the Hyperliquid Policy Center argued that key components of the proposal want clearer boundaries—particularly the place compliance obligations could unintentionally spill over into areas that don’t match the GENIUS Act’s construction or Congress’s intent.
A serious focus of the feedback is how permitted fee stablecoin issuers’ duties ought to work within the secondary market, the place PPSIs should not have a direct relationship with the underlying counterparties.
In their view, the legislation makes clear Congress anticipated due diligence by PPSIs on their very own clients, however didn’t intend a requirement for PPSIs to conduct extra diligence for buying and selling that happens within the secondary market.
The corporations drew an analogy to conventional banking, saying that after regulated establishments run KYC when funds enter the system, they aren’t anticipated to watch each spending occasion after money is withdrawn.
In the identical approach, Paradigm and the Hyperliquid Policy Center argued that decentralized peer-to-peer transfers of stablecoins—and different digital property—ought to typically contain KYC solely on the regulated on-ramps and off-ramps, with compliance prices targeted the place the connection exists.
They warned {that a} opposite strategy may drive necessities for PPSIs to file giant numbers of low-value suspicious exercise stories (SARs), creating “noisy” stories with false positives that may impose prices on each PPSIs and FinCEN with out clear public profit.
Hyperliquid Policy Center Urges Clarification
The remark additionally addresses the way in which the proposed rule defines and assigns obligations associated to “lawful orders.” Paradigm and the Hyperliquid Policy Center stated the proposal defines “lawful order” by incorporating the GENIUS Act definition of “particular person,” which in flip determines who could need to construct technological capabilities.
They argued that, as drafted, the proposed rule may very well be interpreted too broadly, doubtlessly pulling in builders of distributed ledger protocols, decentralized self-custodial interfaces, and different applied sciences that Congress excluded from the GENIUS Act’s definition of a “digital asset service supplier.”
The corporations stated this end result wouldn’t align with Congress’s intent, they usually advisable a clarification within the ultimate rule to explicitly state that sure entities and applied sciences aren’t included throughout the scope of lawful order necessities.
According to Paradigm and the Hyperliquid Policy Center, failing to make that clarification may unintentionally impose lawful order obligations on each validator on networks like Ethereum (ETH), Hyperliquid (HYPE), Solana (SOL), and Layer 2 techniques that validate transactions involving PPSI-issued stablecoins.
They argued the predictable consequence could be that US validator stakes would transfer offshore, US blockbuilding operations would relocate, and the US share of the chain validator base would decline—outcomes they stated would undermine each the GENIUS Act’s onshoring targets and broader US pursuits.
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