Hyperliquid, Paradigm Challenge FinCEN’s GENIUS Rule Proposal

Hyperliquid and Paradigm are pushing back on FinCEN’s proposed rules under the GENIUS Act, warning that an overly broad compliance net could harm the U.S. stablecoin market and decentralized finance (DeFi) ecosystem. In a joint letter to the Treasury on Tuesday, the crypto lobbying arm of Hyperliquid and venture firm Paradigm specifically criticized provisions requiring stablecoin issuers to police secondary markets, stating that such obligations are impractical for permissionless blockchain environments.

The GENIUS Act, signed into law in July 2025, established the first federal framework for stablecoin issuers, requiring 1:1 reserve backing, transparency on reserves, and compliance with anti-money laundering (AML) and sanctions rules. The law’s implementing rules are being phased in, with full compliance expected by January 2027. FinCEN’s April 2026 proposal mandates that issuers must freeze, block, or reject transactions violating U.S. law across both primary and secondary markets. This has sparked industry backlash over its potential impact on DeFi and non-custodial blockchain protocols.

Hyperliquid and Paradigm argue that the rules could force issuers to abandon permissionless environments entirely, as they “cannot meaningfully police” secondary market activity where they lack direct relationships with transacting parties. For example, smart contract interactions could be flagged for sanctions liability even when issuers have no visibility into the counterparties involved.

“The unintended consequences of these rules would be to incentivize issuers to operate only in permissioned environments, driving U.S.-regulated stablecoins out of DeFi,” the letter warned. It further argued this could leave a vacuum filled by offshore, unregulated, and non-dollar stablecoin alternatives—undermining U.S. leadership in the digital asset space.

The GENIUS Act, short for Guiding and Establishing National Innovation for U.S. Stablecoins, was designed to provide legal certainty for stablecoin issuers. Its framework aims to integrate stablecoins into the broader financial system while addressing risks tied to reserves and illicit finance. However, the industry continues to debate how regulators should handle decentralized protocols where traditional compliance models don’t apply.

The letter supports FinCEN’s approach of focusing compliance obligations on the primary market, such as issuers’ requirements to know their customers and monitor direct transactions. But it calls for a “narrow and clear” framework for secondary markets to avoid stifling innovation. This echoes broader tensions in Washington, where lawmakers are also debating the CLARITY Act, a bill that could shield open-source developers from liability related to money laundering and sanctions compliance on DeFi platforms.

With the regulatory rollout still ongoing, the GENIUS Act is expected to reshape the stablecoin market significantly. Its reserve requirements alone are projected to increase demand for short-term U.S. Treasuries, further intertwining the crypto and traditional financial systems. But unresolved questions around DeFi integration and secondary market oversight could determine whether U.S.-regulated stablecoins thrive or lose ground to offshore competitors.

FinCEN has yet to finalize its rules, and stakeholders like Hyperliquid and Paradigm will likely continue lobbying for adjustments. With the January 2027 deadline looming, the next few months could prove pivotal for the future of stablecoins and their role in decentralized finance.

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