How are compliance rules impacting stablecoins? Hyperliquid Policy Center and Paradigm expressed concerns about a proposed compliance rule related to stablecoins within the framework of the GENIUS Act.
The joint comment from these organizations emphasizes support for the proposed rule regarding permitted payment stablecoin issuers, especially FinCEN's decision to focus compliance obligations on the primary market. This primary market includes direct relationships between an issuer and its customers, such as issuing, redeeming, and custody of stablecoins.
Understanding the distinction between primary and secondary market activities is crucial. Secondary market transactions involve wallet transfers, trades on decentralized exchanges, and other interactions where the issuer does not have a direct relationship with the parties. The groups emphasized that compliance requirements should mirror those in traditional finance. For instance, a bank checks its customers' backgrounds but does not monitor how they use their cash.
Stablecoin issuers should manage obligations related to their direct customers without the burden of tracking every wallet or transaction that uses their tokens. The comment also supports FinCEN’s stance against requiring suspicious activity reports for secondary market transactions, noting that issuers often lack sufficient customer information for effective monitoring.
Concerns escalated regarding OFAC’s proposed policies, as HPC and Paradigm warned that aligning smart contract interactions with ongoing services might unfairly impose liability on stablecoin issuers for actions beyond their control.
This situation could incentivize issuers to revert away from permissionless blockchains, potentially limiting U.S. regulated stablecoins' roles in decentralized finance and creating opportunities for unregulated alternatives to thrive.
Additionally, the groups sought clarification from the agencies to ensure that downstream developers, validators, decentralized exchanges, lending protocols, and self-custody interfaces are not caught under the compliance rules intended for stablecoin issuers. A broad interpretation could present legal uncertainties for U.S. infrastructure providers.
Lastly, HPC and Paradigm called for recognition of programmable compliance tools, such as smart contract-based transfer restrictions, suggesting these could enable issuers to prevent prohibited transactions proactively. They also urged OFAC to provide compliant issuers with clearer guidelines, including potential penalties, fostering a more stable regulatory environment for the industry.