Paradigm, HPC challenge proposed stablecoin rule

Paradigm, a venture capital firm, and HPC, a crypto infrastructure provider, this month filed formal objections with the agency responsible for a proposed stablecoin rule. The filing argues the draft’s definitions and compliance requirements are broad enough to apply to on-chain protocols and noncustodial actors not targeted by the proposal.

The challengers contend the rule could require automated or permissionless services to meet standards designed for centralized issuers and custodians. The filing states that could create legal uncertainty for decentralized finance participants and for firms that build infrastructure on public blockchains.

The filing highlights two main risks. It argues the rule’s scope could affect market integrity by imposing obligations on actors that do not control token supply or reserves, potentially disrupting routine on-chain activity such as automated market making, lending and programmatic transfers. It also warns that treating smart contracts and protocol-level code as subject to traditional securities or banking definitions would broaden the rule’s reach into decentralized systems.

Paradigm and HPC argue compliance rules for reserve management, custody and reporting could be difficult or impossible for decentralized projects to meet without centralizing control. The filing notes forcing protocols to adopt custodial arrangements or to name a single accountable party would change protocol design and governance and could affect users and liquidity providers.

The submission raises enforcement concerns, noting protocols that operate across jurisdictions and on public chains present novel jurisdictional and evidence-collection challenges for regulators.

As alternatives, the challengers propose exemptions for activities that are fully automated and do not rely on a human intermediary, adjustments to custody requirements to fit noncustodial architectures, and a registration process that applies only when a protocol meets a defined threshold of centralization or operational control. The filing states these changes would preserve the rule’s consumer-protection aims while limiting unintended effects on decentralized services.

Industry reaction has been mixed. Some market participants back tighter stablecoin rules to address reserve shortfalls and consumer harm. Others welcomed the challenge as a prompt for regulators to narrow definitions and to apply rules that are neutral to underlying technology.

Stablecoins are widely used for settlement, lending and liquidity provision in digital-asset trading and decentralized finance. Policymakers in several jurisdictions are working on guardrails for issuers and intermediaries after episodes of market stress revealed gaps in transparency and reserve practices. The debate over the rule centers on how to draw a clear line between centralized stablecoin issuers and decentralized services that interact with those tokens.