Crypto investment firm Paradigm and the Hyperliquid Policy Center warned U.S. regulators that proposed stablecoin anti-money laundering rules could push regulated dollar tokens away from permissionless DeFi if issuers are made responsible for secondary market activity.
In a letter sent Tuesday to FinCEN and OFAC, the two industry groups challenged a proposed rule implementing the GENIUS Act’s anti-money laundering and sanctions requirements for permitted payment stablecoin issuers.
Such an approach could create a “chilling effect” that discourages issuers from deploying to permissionless blockchains, the groups wrote, warning it could end up “pulling U.S.-regulated stablecoins out of DeFi.”
The two argue that regulators should separate primary issuance, where issuers have direct customer relationships, from secondary market activity, where stablecoins move through wallets, decentralized finance apps, and validators outside an issuer’s direct control.
A wallet address “that simply holds or transfers” a stablecoin should not be treated as an issuer customer, the groups argued. Developers, protocol operators, and validators should also be protected from issuer-style obligations when they have “no direct relationship with the issuer,” they added.
Paradigm and the Hyperliquid Policy Center argue that applying issuer-style rules to secondary market activity would add little value for regulators. Instead, it could generate “an avalanche of noisy, false-positive-laden, low-value SARs,” they wrote, referring to suspicious activity reports.
Keeping an eye on stablecoins
The question at issue is on how regulators could continue to police stablecoin use without turning just about every other part of the market into a regulated middleman.
Regulators are trying to make sure stablecoins do not become “a blind spot for sanctions enforcement and illicit finance” as they grow as global payment rails, Matthew Pinnock, COO at Altura DeFi, told Decrypt.
