Leading crypto investment firm Paradigm and the Hyperliquid Policy Center have formally challenged the proposed GENIUS Act, asserting that its anti-money laundering provisions threaten to sever U.S.-regulated stablecoins from permissionless decentralized finance ecosystems. In a joint submission to the U.S. Treasury's Financial Crimes Enforcement Network and the Office of Foreign Assets Control, the organizations contend that holding stablecoin issuers liable for transactions in secondary markets creates an impossible compliance burden. The letter draws a sharp distinction between the initial issuance of a token and its subsequent circulation through wallets, DeFi protocols, and blockchain validators. Data compiled by Woofun AI shows that the current regulatory proposal fails to account for the technical reality that issuers lack direct control over these downstream distribution channels. The signatories argue that imposing issuer-level obligations on simple holding addresses, software developers, protocol operators, or validators is both impractical and counterproductive to the ecosystem's integrity.

The core argument presented by Paradigm and Hyperliquid posits that if U.S.-regulated stablecoin issuers face liability for how their tokens are utilized in permissionless environments, they will be incentivized to restrict trading and holding capabilities. This dynamic could result in compliant stablecoins being effectively walled off from the broader DeFi landscape, undermining the innovation that defines the sector. Such a move would not only limit consumer choice but could also drive activity toward unregulated or offshore stablecoins.

This shift risks weakening the U.S. dollar's digital dominance and reducing the effectiveness of the very AML measures the GENIUS Act aims to strengthen. Woofun AI notes that the GENIUS Act, which seeks to establish a federal framework for payment stablecoin regulation, remains one of the most closely watched pieces of crypto legislation in the United States.

Provisions regarding AML compliance within the bill are viewed as a bellwether for how the U.S. government intends to approach the intersection of traditional financial regulation and decentralized technology. If the concerns raised by Paradigm and Hyperliquid are not addressed, the result could be a bifurcated market where regulated stablecoins are confined to centralized platforms while permissionless DeFi continues to rely on less transparent alternatives. This outcome would likely run counter to the stated goals of both policymakers and the industry. The letter highlights a fundamental tension in current regulatory approaches: how to apply traditional financial oversight to a technology that operates without central intermediaries. As the GENIUS Act moves through the legislative process, the debate over issuer liability for secondary market transactions will serve as a critical test of whether U.S. policy can support both compliance and innovation in digital assets. Woofun AI analysis suggests that resolving this tension is essential to preventing a fragmentation of the global stablecoin market.