Hyperliquid, Paradigm Urge Treasury to Narrow Stablecoin Rules

HYPE token dropped by roughly -11% on the day the letter was made public, as reported by Hyperliquid News. HYPE is one of the strongest-performing digital assets in recent months, surging from around $20 in early 2026 to over $75 at the beginning of this month, though it has cooled off over the past week, dropping back to roughly $55. The token had previously been one of the strongest performers before the recent selling pressure.

The proposal mandates that issuers must block or reject transactions violating US law or sanctions, a requirement some argue is nearly impossible to enforce effectively. As reported by Hyperliquid News, the primary market obligations are straightforward, but the secondary market poses challenges since issuers only see wallet addresses and lack customer identities after the stablecoin is issued. Recent events, like the USD1 stablecoin freeze-and-delist saga, highlight the complexities of secondary-market enforcement. The groups argue that compliance rules should follow the same logic used in traditional finance - a bank performs due diligence on customers who open accounts, but does not monitor how those customers spend cash after withdrawing it. In their view, the law makes clear Congress expected due diligence by PPSIs on their own customers, but did not intend a requirement for PPSIs to conduct additional diligence for trading that occurs in the secondary market.

The groups raised sharper concerns with OFAC's proposed approach, arguing that OFAC appears to treat smart contract interactions as an ongoing service provided by the issuer, potentially making stablecoin issuers liable for secondary market transactions they cannot meaningfully monitor or control. According to the latest comment, this could create a strong incentive for issuers to avoid permissionless blockchains and deploy only in permissioned environments. The joint letter supports FinCEN's decision not to require suspicious activity reports for secondary market transactions, arguing that issuers usually lack the customer information needed to assess wallet transfers beyond addresses and amounts. They also warned that a broad reading could create legal uncertainty for US-based infrastructure providers. The comment also addresses the way the proposed rule defines and assigns obligations related to "lawful orders." Paradigm and the Hyperliquid Policy Center said the proposal defines "lawful order" by incorporating the GENIUS Act definition of "person," which in turn determines who may have to build technological capabilities. They argued that, as drafted, the proposed rule could be interpreted too broadly, potentially pulling in developers of distributed ledger protocols, decentralized self-custodial interfaces, and other technologies that Congress excluded from the GENIUS Act's definition of a "digital asset service provider."

The groups warned that an overbroad "lawful order" definition could pull in validators, protocol developers and Layer-2 operators, driving US stakes and blockbuilding offshore and risking setbacks to crypto adoption, DeFi security, and interoperable CEX/DEX activity. According to Paradigm and the Hyperliquid Policy Center, failing to make that clarification could unintentionally impose lawful order obligations on every validator on networks like Ethereum (ETH), Hyperliquid (HYPE), Solana (SOL), and Layer 2 systems that validate transactions involving PPSI-issued stablecoins. They argued the predictable outcome would be that US validator stakes would move offshore, US blockbuilding operations would relocate, and the US share of the chain validator base would decline—outcomes they said would undermine both the GENIUS Act's onshoring objectives and broader US interests. The firms also warned that a contrary approach could drive requirements for PPSIs to file large numbers of low-value suspicious activity reports (SARs), creating "noisy" reports with false positives that would impose costs on both PPSIs and FinCEN without clear public benefit.

The GENIUS Act was signed into law last year, with implementation expected by January 2027, and regulators are still refining related rules including ongoing CLARITY Act discussions in the Senate. 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. 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. The debate underscores a tension between robust enforcement capabilities and preserving the open, permissionless nature of digital assets, with institutions and regulated entities watching how regulators translate GENIUS Act provisions into concrete requirements. 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. The Treasury Department has not yet responded publicly to the letter, and as the comment period for the proposed rules continues, stakeholders across the crypto ecosystem are watching closely for any adjustments that could balance compliance with innovation.