Why Hyperliquid's backers want Treasury to narrow DeFi AML rules

Venture firm Paradigm and the Hyperliquid Policy Center asked the US Treasury on Tuesday, June 9, 2026, to narrow a proposed rule that would put bank-style money-laundering checks on the companies that issue stablecoins. They are not trying to kill the rule. They support most of it. Their objection is about one part: the draft, they say, could hold an issuer responsible for what people do with its tokens later, out on public blockchains, where the issuer has no way to know who those people are or to stop a transaction once it starts.

The two groups filed their letter on the last day Treasury was accepting public comments. A separate crypto policy group, Coin Center, made a similar case on the same deadline. None of these letters changes any rule yet. They are arguments aimed at the agencies writing the final version.

What did they actually ask for?

Two changes, both narrow.

First, some terms used here. A stablecoin is a crypto token meant to hold a fixed value, usually one US dollar. Anti-money-laundering rules, often shortened to AML, are the checks that financial firms run to spot dirty money: verifying who a customer is, watching for suspicious activity, and reporting it. The proposed rule comes from two arms of the US Treasury. FinCEN, the Financial Crimes Enforcement Network, is the agency that writes and enforces those AML rules. OFAC, the Office of Foreign Assets Control, runs US sanctions, the lists of people and addresses that American firms are barred from dealing with.

In April 2026, FinCEN and OFAC jointly proposed a rule that would treat stablecoin issuers like financial institutions under the Bank Secrecy Act, the federal law that requires banks to keep records and report suspicious transactions. The rule carries out the GENIUS Act, a 2025 law that set up the first federal framework specifically for payment stablecoins.

Paradigm and the Hyperliquid Policy Center said they back the rule where it focuses on the primary market, the point where an issuer creates new tokens for a customer or buys them back. There, the issuer has a direct relationship with the customer and can run identity checks. Their two requests, drawn from the letter:

• Narrow the definition of "payment stablecoin-related activity" so the rule does not sweep in transactions issuers never touch.
• Reconsider how OFAC treats smart-contract interactions, which the groups say could make issuers liable for trades they cannot monitor or stop.

In their words, from the letter: "We broadly support the proposed rule, and in particular FinCEN's decision to tailor most issuer obligations to the primary market, but write to recommend that certain secondary market obligations be clarified or narrowed to avoid unintended consequences for permissionless blockchain infrastructure and the DeFi ecosystem."

What is the primary-versus-secondary-market problem?

This is the core of the dispute. It comes down to where the issuer can see and where it cannot.

When you buy a stablecoin straight from the issuer, that is the primary market. The issuer knows you. It checked your identity. If something looks wrong, it can act.

Once you send that token to someone else, or trade it on a decentralized exchange, or deposit it into a lending app, you are in the secondary market. The issuer is no longer in the loop. On a public blockchain, all the issuer can see is a wallet address and an amount. It does not know the person behind the wallet, has no contract with them, and cannot reverse the transfer.

Paradigm and the Hyperliquid Policy Center used a comparison that lands cleanly: a bank checks who you are when you open an account, but it does not follow the cash around after you withdraw it. They argued the same logic should apply to stablecoins. An issuer should know its own customers, they said, and should not be made to vouch for every wallet that later touches its tokens.

The groups raised their sharpest concern with OFAC. They argued the agency appears to treat a smart contract as an ongoing service the issuer provides, which could leave the issuer on the hook for secondary-market activity it cannot meaningfully control. They described the result as issuers being "subject to strict liability for transactions they cannot meaningfully police," a legal term meaning you are responsible even if you did nothing wrong and could not have prevented it.

What would it mean for someone using DeFi?

If you trade on a decentralized protocol, this is the part that touches you. DeFi, short for decentralized finance, means the apps that let people trade, lend, and borrow directly on a public blockchain, with no bank or broker in the middle.

The groups' warning is about where US-regulated stablecoins end up. If an issuer can be punished for transactions it cannot watch, they argued, it has a strong reason to keep its tokens off public blockchains and inside closed, permissioned systems instead. In the letter: "An issuer facing obligations it cannot meet on the secondary market has a strong incentive to deploy only to permissioned environments, pulling U.S.-regulated stablecoins out of DeFi and creating a void filled by unregulated, offshore, non-dollar alternatives."

The fear comes down to this: the dollar-backed, US-supervised stablecoins pull back from open protocols, and the gap fills with tokens issued in places with looser oversight. A trader on a US-regulated front end could find fewer compliant options, while the riskier ones stay easy to reach.

That is the issuers' and the venture firm's framing. It assumes issuers would retreat rather than adapt, and that offshore tokens would absorb the demand. A regulator reading the same proposal might judge that wider monitoring is worth the cost, or that issuers have other ways to comply. The letter is one side of an open argument.

This is also why a rule aimed at stablecoins and on-chain perpetual futures matters more for Hyperliquid than for most. Perpetual futures, or perps, are leveraged bets on an asset's price that never expire, and the stablecoin a trader posts is the collateral behind the bet. As covered in "Hyperliquid now does about half of on-chain perps" (June 3), a large share of this trading runs through one venue. A rule that reshapes how stablecoins move on public chains reaches the rails Hyperliquid runs on.

Who is pushing, and who funds them?

Worth knowing, because it shapes how to read the letter.

Paradigm is a venture capital firm and a backer of Hyperliquid. The Hyperliquid Policy Center, or HPC, is a DeFi advocacy group set up in February 2026. The Hyperliquid Foundation funded it with roughly $29 million worth of HYPE tokens, Hyperliquid's own token. Jake Chervinsky is the center's chief executive.

Both signers have a stake in how DeFi gets regulated. That does not make their technical point wrong. The claim that an issuer cannot see who is behind a wallet on a public chain describes how these networks actually work. It does mean the policy ask, narrow the rule, comes from parties who would benefit from a narrower rule. Both things hold at once.

Coin Center, the group that filed a parallel comment, is a crypto policy nonprofit. It submitted its comments to Treasury on October 20, 2025, and argued issuers should only carry AML duties at the moment tokens are issued or redeemed, rather than for peer-to-peer transfers between wallets. Coin Center also pointed to a cost-benefit problem: the US spends roughly $26 billion a year on AML compliance across its financial firms, it said, while recovering less than 1% of criminal proceeds. Extending that same framework to stablecoin issuers, the group argued, would build a wide surveillance net for little gain. As an alternative, it pointed to zero-knowledge proofs, a cryptographic method that can confirm something is true without revealing the underlying data, as a way to run checks at the on-ramps without watching every ordinary transfer.

What are we watching?

The comment window closed on June 9, 2026, so the next move belongs to the agencies.

FinCEN and OFAC will review the comments, including these letters, before writing a final rule. Three things will decide who comes away happy. Whether the final definition of "payment stablecoin-related activity" gets narrowed the way the groups asked. Whether OFAC changes how it treats smart-contract interactions or holds its line. And whether the final rule draws a clear boundary between primary-market duties, which the industry accepts, and the secondary-market ones it is fighting.

Until a final rule lands, this is a filing, not a decision. The arguments are now on the record. What Treasury does with them is the thing to follow.