Two digital asset groups have urged U.S. regulators to narrow parts of a proposed stablecoin rule, warning that current language could extend compliance obligations beyond what issuers can realistically control.
Hyperliquid Policy Center and Paradigm submitted a joint comment to the U.S. Treasury’s Financial Crimes Enforcement Network and the Office of Foreign Assets Control in response to draft rules tied to the GENIUS Act. The proposal sets anti-money laundering and sanctions compliance requirements for permitted payment stablecoin issuers, often referred to as PPSIs.
The firms backed the broader goal of strengthening oversight but challenged how the rule treats activity that takes place outside direct issuer control. Their letter focused on the distinction between primary and secondary market activity, which sits at the center of the proposed framework.
In a second regulatory front today, @Paradigm filed a joint comment with @HyperliquidPC on Treasury’s AML and sanctions rules for stablecoin issuers under GENIUS. FinCEN and OFAC got a lot right, but work remains to provide legal certainty to both issuers and developers. pic.twitter.com/rkiBHda1HX
— Stefan Schropp (@SPSchropp) June 9, 2026
The division between primary and secondary markets shapes debate
The draft rule separates stablecoin activity into two categories. Primary market activity includes issuance, redemption, and custody, where issuers maintain direct relationships with users. Secondary market activity covers peer-to-peer transfers, decentralized exchange trades, and other blockchain-based interactions where issuers do not participate directly.
In their filing, the groups endorsed FinCEN’s approach to concentrate compliance duties in the primary market. They argued that issuers possess customer data and operational control only at that level. The letter drew a comparison to traditional banking practices, where institutions verify customers at onboarding rather than tracking every downstream transaction.
“The same principle should guide the agencies’ implementation of AML and sanctions requirements,” the groups wrote.
FinCEN’s proposal reflects that principle in part. It avoids imposing full reporting obligations on transactions that occur beyond the issuer’s direct reach. However, the firms said the framework requires further clarification to prevent overlap with other provisions.
OFAC treatment of blockchain activity raises concern
The strongest criticism in the letter targets OFAC’s interpretation of secondary market activity. According to the filing, the draft rule treats interactions with smart contracts as an ongoing service provided by the issuer. That interpretation places potential liability on issuers even when they lack visibility into transaction participants.
“Issuers are subject to strict liability for transactions they cannot meaningfully police,” the letter states.
The groups argued that this standard conflicts with the technical structure of public blockchains. In many cases, issuers can observe wallet addresses and transaction values but cannot identify users or halt transactions after tokens circulate.
They warned that such requirements could push issuers toward permissioned systems, where access remains restricted and identity checks apply at every stage. That shift could limit the presence of regulated stablecoins in decentralized finance markets.
Risk of spillover to developers and infrastructure
The joint comment also addressed the potential impact on software developers and blockchain infrastructure participants. The firms said certain provisions could extend compliance expectations to groups that Congress excluded from the GENIUS Act.
Developers of decentralized exchanges, validators, and providers of self-custody tools could face indirect obligations if the rule remains broad. The letter argued that such an outcome would conflict with legislative intent and create barriers for open-source development.
The GENIUS Act, signed into law in July 2025, established a federal framework for payment stablecoins. It limits issuance to approved entities subject to federal or state supervision. Regulators now face the task of translating that framework into operational rules.
Proposed adjustments focus on technical limits
Hyperliquid Policy Center and Paradigm outlined several recommendations to address these concerns. They called for maintaining the current approach that excludes secondary market transactions from Suspicious Activity Report requirements. They also asked regulators to confirm that safe harbor provisions apply to downstream protocol participants.
The letter urged agencies to clarify that the Travel Rule does not apply to wallet-to-wallet transfers when issuers lack a direct relationship with users. It also proposed extending safe harbor protections to developers and interface providers to encourage voluntary cooperation with authorities.
Another recommendation involves recognition of smart contract-level compliance tools. These include transfer restrictions and blocklists that prevent transactions with sanctioned addresses. The firms argued that such mechanisms should satisfy technical compliance requirements under the law.
They also asked regulators to define “customer relationship” more narrowly. Under their proposal, users who transact only in secondary markets without interacting with issuers would fall outside that definition.
Broader policy debate continues
The proposed rule, first published in April, requires stablecoin issuers to maintain anti-money laundering programs, comply with sanctions rules, and implement systems capable of blocking or rejecting prohibited transactions. It forms a key part of the GENIUS Act’s implementation.
The comment letter reflects a broader tension in crypto regulation. Authorities aim to apply financial safeguards to digital assets, while industry participants point to technical limits within decentralized systems.
The outcome of this rulemaking process could shape how stablecoins operate across both controlled platforms and open blockchain networks. Regulators have not yet issued a final version of the rule.
Gunel Ismayilova
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