Hyperliquid and model Push for Clearer Stablecoin Regulations: What's At Stake?

Is the US at risk of over-regulating its rising stablecoin sector? Hyperliquid Policy Center and venture capital firm model think so, and they're pushing back with a recent joint comment to the US Treasury, highlighting the potential pitfalls of the proposed stablecoin compliance rule tied to the GENIUS Act.

The Raw Data

The proposal aims to enforce anti-money laundering (AML) and sanctions requirements specifically for permitted payment stablecoin issuers (PPSIs). However, Hyperliquid and model argue that the draft rule's ambiguity could inadvertently expand compliance obligations beyond what Congress intended. They caution that requiring PPSIs to conduct due diligence on secondary market transactions, where they've no direct client relationship, could lead to unnecessary compliance burdens and costs.

The analogy drawn is to traditional banking, where institutions conduct Know Your Customer (KYC) checks as funds enter but aren't expected to track every subsequent transaction. In this context, the firms believe the stablecoin rule should similarly focus compliance efforts at the onramps and offramps.

Context and Concerns

Why does this matter? Tokenization isn't a narrative. It's a rails upgrade. As digital assets, including stablecoins, become integral to global finance, finding the balance between regulation and innovation is essential. With the stablecoin market rapidly growing, the US risks stifling innovation if it imposes excessive compliance requirements. Such a move could push crypto operations to more lenient jurisdictions.

According to Hyperliquid and model, the current proposal might impose 'lawful order' obligations on a broad range of entities, from blockchain developers to validators, potentially contradicting the GENIUS Act's exclusion of certain technologies from these requirements. The anticipated result? US validators could move offshore, diminishing the country's strategic position in the crypto industry.

Industry Insights

Insiders are watching closely. The stakes are high for both regulators and the crypto community. A misstep could drive innovation abroad, reducing the US's influence in the digital currency space. Traders and analysts are particularly concerned about the impact on blockchain networks like Ethereum, Solana, and Hyperliquid, where validator operations could be affected.

But here's the thing: if the US loses a significant share of its blockchain validator base, it doesn't just affect crypto firms. It could undermine the broader US interests in maintaining a competitive edge in blockchain technology and digital finance.

What's Next?

Expect more heated discussions as stakeholders push for clarity in the rule's final version. The US Treasury's response will be essential, with potential revisions directly impacting compliance costs and innovation trajectories. One key date to watch is when the final rule is expected to be issued. If the Treasury heeds the advice of firms like Hyperliquid and model, we might see a refined rule that's less burdensome yet effective in managing illicit-finance risks.

The stablecoin space represents a essential intersection where physical meets programmable. As regulations evolve, the challenge will be ensuring they enhance rather than hinder this transformation.