Treasury Stablecoin Proposal Draws Major Warning From Hyperliquid Policy Center: Regulatory Overreach Looms
The Hyperliquid Policy Center (HPC) and venture capital firm Paradigm filed a joint comment with the US Treasury, and the warning lands harder than the usual policy memo: the proposed stablecoin compliance rules could hit decentralized finance harder than Treasury appears to intend. My take: this is less about stablecoins as a product and more about who gets forced to behave like the control point. Loose wording, they argue, would make DeFi more expensive to use, push US crypto teams overseas, and make stablecoins harder to move through the market. Why does this matter? Because stablecoins sit underneath crypto trading in places traders barely think about until something gets slower or pricier: $ETH staking, Layer 2 liquidity, bridge flows, exchange settlement, and the basic market plumbing behind the screen.
On Tuesday, HPC and Paradigm urged the Financial Crimes Enforcement Network (FinCEN) and the Office of Foreign Assets Control (OFAC) to tighten the wording in the proposed stablecoin compliance rule tied to the $GENIUS Act. The rule would apply anti-money laundering (AML) and sanctions rules to “permitted payment stablecoin issuers” (PPSIs). Treasury says it wants PPSIs to keep building while dealing with illicit finance risk. Fair enough. But that is only half the story. The problem is the edge cases. In crypto, the edge cases are where the bill usually shows up.
Paradigm and HPC are not trying to kill the framework. They are making a narrower, more technical argument: PPSI obligations need defined edges, especially in secondary markets where issuers usually do not know the people trading their stablecoins. Congress, in their reading, wanted PPSIs to check their own customers, not monitor every later trade between strangers. That sounds like a lawyerly distinction. It is not. If stablecoin issuers have to police secondary market activity, the costs move outward through exchanges, DeFi apps, wallets, bridges, and eventually users in the form of higher fees, slower transfers, or more failed flows.
The banking comparison is the cleanest part of the comment. When a bank runs KYC as money enters the system, it does not track every purchase someone makes after withdrawing cash. HPC and Paradigm say stablecoins should be treated roughly the same way. I think that analogy works, with one caveat: stablecoins move faster than cash and leave more machine-readable traces, so regulators will be tempted to ask for more. Counter to the usual advice, more visibility does not automatically mean better enforcement. KYC belongs mainly at regulated on-ramps and off-ramps, where there is an actual customer relationship. Push the duty further than that and PPSIs could end up filing huge numbers of low-value suspicious activity reports (SARs), many likely false positives. More noise for FinCEN. More spend for issuers. Not much obvious public benefit. Traders would feel it quickly, because a few extra basis points can matter when margins are already thin.
The comment also challenges the proposed rule’s definition of “lawful orders.” Paradigm and HPC say the proposal borrows the $GENIUS Act definition of “person” in a way that could decide who must build technical compliance tools. As written, they argue, the rule could be read too broadly. It might pull in developers of distributed ledger protocols, decentralized self-custody interfaces, and other tools Congress excluded from the $GENIUS Act’s definition of a “digital asset service provider.” This is the part protocol teams should be watching closely. Not later. Now.
If Treasury does not narrow the language, HPC and Paradigm warn that lawful order duties could reach validators on Ethereum ($ETH), Hyperliquid ($HYPE), Solana ($SOL), and Layer 2 networks that process PPSI-issued stablecoins. That would get messy fast. Yes, this partly contradicts the idea that issuers are the main regulated actors; bear with me. The danger is that a rule aimed at PPSIs starts behaving like a rule for infrastructure. If $ETH validators face new compliance burdens, some may decide the yield is not worth the hassle. Participation could fall, staking could concentrate with larger operators, and the network could become less decentralized. The firms see a likely chain reaction: US validator stakes move offshore, US blockbuilding firms relocate, and the US share of chain infrastructure shrinks. That would clash with the $GENIUS Act’s onshoring goals. It would also add pressure to an already nervous market. $HYPE recently pulled back after reaching new highs above $75 last week, and more regulatory uncertainty would not help sentiment.
What this means
HPC and Paradigm are warning that US stablecoin regulation is nearing the point where wording does the real work. The issue is not whether stablecoin issuers should follow AML and sanctions rules. They should. The question is whether Treasury writes the rules around actual issuer relationships or stretches them across Ethereum validators, Solana validators, self-custody interfaces, bridges, lending venues, and other parts of the crypto stack. Is this overkill? For a narrow issuer rule, yes. A broad reading could raise costs for issuers and users, especially people using stablecoins for trading, lending, payments, or DeFi liquidity. It could also push more capital and developers outside the US. I would not be surprised to see non-US stablecoins gain share if domestic rules become too heavy.
Investors and traders should watch the final wording, not just the headline. The key terms are “person” and “lawful order.” If FinCEN or OFAC make clear that validators, protocol developers, and self-custody interface builders are outside the direct compliance dragnet, the market may breathe a little. If they do not, proof-of-stake networks such as $ETH and $SOL could react sharply. Stablecoins are boring until they are not. I’ll be honest: this is exactly the kind of rule that looks procedural right up until spreads widen, integrations stall, and legal teams start slowing product launches. This rule could decide how expensive, slow, or legally awkward stablecoins become in the US.