DeFi Groups Push Back on GENIUS AML Rules
Humanity Protocol Drained $32M | Aave Proposes New Risk Framework
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Good Morning.
GENIUS Act implementation is exposing the first real fault line between TradFi compliance logic and DeFi infrastructure. If Treasury doesn’t narrow secondary market liability, US-regulated stablecoins get structurally excluded from permissionless chains, and offshore alternatives fill the void.
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In Today’s Email:
What Matters: DeFi Groups Push Back on GENIUS AML Rules 👀
Case Study: Humanity Protocol Drained $32M, Token Crashes 🔎
Governance & Features: Aave Proposes New Risk Framework Post-Kelp 👻
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WHAT MATTERS
DeFi Groups Push Back on GENIUS AML Rules
State of play: Paradigm and Hyperliquid Policy Center filed a joint letter urging the US Treasury to narrow its proposed GENIUS Act AML rule, warning that extending issuer liability to secondary market activity would push regulated stablecoins out of DeFi entirely.
FinCEN and OFAC’s April proposal would treat stablecoin issuers like financial institutions under the Bank Secrecy Act, including obligations for secondary market transactions they cannot meaningfully monitor.
HPC and Paradigm support primary market compliance requirements but argue OFAC’s smart contract liability extension imposes obligations issuers structurally cannot meet.
If left unchanged, the rule would incentivize issuers to deploy only on permissioned chains, ceding DeFi market share to unregulated offshore alternatives.
Why it matters: GENIUS Act implementation is now the real fight. Treasury’s secondary market liability definition will determine whether US-regulated stablecoins stay in permissionless DeFi or get pushed out.
Our take: Strict liability for transactions issuers can’t control is a DeFi exit ramp. The argument is sound, but the outcome depends on how receptive Treasury is.
For builders and investors: Watch the final rule’s smart contract language. It’s the key variable for whether compliant stablecoins remain viable in permissionless deployments.
CASE STUDY
Humanity Protocol Drained $32M, Token Crashes
Wallets linked to Humanity Protocol were exploited for over $32M, with the team attributing the breach to a private key compromise, while onchain sleuths question whether the incident was staged.
17 wallets holding H tokens were drained, with $23.7M already swapped for ETH and $7.9M remaining in H tokens.
Founder Terence Kwok blamed a private key compromise by a Humanity Foundation member, but ZachXBT suspects the team’s story is cover for a market maker exit.
The hacker minted 100M H tokens and dumped them for BNB, sending the H token down 89% in 24 hours.
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INSIGHTS
Backpack Adds Ex-SEC Chair, Eyes US Perps
State of play: Backpack US appointed former SEC Acting Chairman Michael Piwowar to its board as the exchange pushes to expand regulated perps trading in the US following the CFTC’s approval of bitcoin perpetual futures.
Piwowar served as SEC commissioner from 2013 to 2018 and briefly as acting chairman in 2017, where he rejected the Winklevoss bitcoin ETF application.
The appointment follows Backpack’s launch of a stock trading platform blending traditional and tokenized equities, and signals a broader US regulatory expansion push.
Backpack President Mark Wetjen, himself a former CFTC acting chairman, called the CFTC’s bitcoin perps approval a defining moment for bringing offshore products to regulated US exchanges.
FEATURES & GOVERNANCE UPDATE
Aave Proposes New Risk Framework Post-Kelp
Aave founder Stani Kulechov introduced a new risk framework developed with LlamaRisk following the $292M KelpDAO rsETH bridge exploit in April, which spread contagion directly into Aave V3.
The April exploit saw 116,500 rsETH tokens stolen via a LayerZero bridge attack, with the attacker depositing proceeds into Aave V3 as collateral to borrow WETH and threaten bad debt.
The proposed framework covers asset risk, bridging risk, chain risk, and automated monitoring across Aave V3, V4, and Aave Horizon.
Assets failing to meet the new standard will be offboarded in the coming weeks once the proposal clears governance.
Other notable feature updates:
Tangent raises borrow caps 50%.
Felix HIP-3 dex begins shutdown.
Makina season 3 rewards go live.
Circle launches bitcoin-backed cirbtc.
Coinbase activates aqav2 on hyperliquid.
Yield Basis lowers vault collateral requirement.
QUICK BITES
US Bitcoin ETFs log further outflows.
Kalshi requires traders to disclose employers.
Backpack US appoints former SEC Acting Chairman.
Japan’s SBI Shinsei Bank plans crypto rewards program.
New Aave risk framework proposed following KelpDAO exploit.
EU proposes expanded sanctions on Russia-linked crypto platforms.
GSR receives FINRA approval to complete broker-dealer acquisition.
Hyperliquid advocate and Paradigm urge US to revise proposed AML.
Japan’s three megabanks to debut live stablecoin transactions by March 2027.
House crypto tax hearing reveals divide over urgency in advancing legislation.
NOTEWORTHY READS & MEME
Gaspardlezin’s read on Privacy stablecoins.
Bmoney’s read on The Global Stablecoin Card Map.
HPC’s read on Joint Comment on Treasury’s GENIUS Act Proposed Rule.
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