Summary
Hyperliquid founder Jeff Yan said the platform wants to attract more financial institutions and expand its financial activities, while arguing that compliance obligations should fall on institutions operating markets on the network rather than on the underlying blockchain itself. U.S. regulators and lawmakers are still assessing how decentralized derivatives infrastructure should fit within existing rules.
The central question: who is responsible?
Hyperliquid founder Jeff Yan has put forward a regulatory argument that could shape how decentralized derivatives markets seek institutional participation. In an interview referenced by Bloomberg and summarized by TechFlow, Yan said compliance obligations should be directed primarily at the financial institutions that use a blockchain to operate specific markets, rather than treating the entire underlying network as a centralized exchange.
The position comes as Hyperliquid seeks to bring in more financial institutions and broaden its financial activities. It also reflects a wider debate over whether the legal responsibilities associated with a financial market should attach to the base-layer infrastructure, the developers and entities supporting it, or the identifiable institutions that provide services to customers.
The issue is not limited to the classification of one platform. As decentralized trading systems become more visible to traditional financial firms, regulators are being asked to determine how existing rules should apply when market infrastructure, execution, liquidity and customer access are distributed across different layers.
A proposed separation between infrastructure and applications
Yan’s argument rests on a distinction between the Hyperliquid Layer 1 network and the entities that build or operate financial applications on top of it. In this framing, the blockchain is an open technical system responsible for validating transaction states, maintaining records and supporting data availability. It does not, by itself, act as a conventional broker, exchange or customer-facing intermediary.
The institutions that deploy a trading venue, operate a front end, provide liquidity, manage customer relationships or market financial products would instead be the parties performing regulated functions. Those entities, under the proposed model, would be responsible for know-your-customer checks, anti-money-laundering controls, market surveillance, customer eligibility and regulatory reporting.
There is an analogy to the way traditional markets divide responsibilities among exchanges, brokers, clearing houses, custodians and asset managers. A blockchain-based system could, in theory, provide shared settlement and execution infrastructure while licensed institutions operate defined markets with their own controls and customer policies.
Such a structure could offer a route for regulated firms to use public blockchain technology without requiring the entire network to become a centralized, fully licensed exchange. It could also allow different institutions to build separate markets with distinct access rules. But the existence of a technical separation does not automatically establish a legal separation.
Why regulators may look beyond the code
Financial regulators commonly examine practical control and economic function, not only formal labels or software architecture. Questions may include who writes or changes the market rules, who controls upgrades, who maintains critical components, who determines which products are available, who can restrict access and who benefits from the activity.
That means a network’s open-source code or distributed validator set may not settle the question of responsibility. If a development team, governance group or affiliated organization has substantial influence over how the market operates, authorities could seek to identify that influence even if no single entity formally owns the entire system.
The same issue applies to the application layer. If a front end, liquidity provider, market maker, protocol team and customer service provider jointly perform the functions of a trading venue, regulators may need to determine how responsibility is allocated among them. A model based on distributed roles can create more precise accountability, but it can also make enforcement and supervision more complicated.
The regulatory challenge is therefore two-sided. Treating every open blockchain as a conventional exchange could discourage the development of general-purpose infrastructure and blur important distinctions between software and financial intermediation. At the same time, allowing market operators to rely entirely on decentralization claims could create an avenue for avoiding obligations that would apply to comparable centralized services.
Institutional participation raises practical questions
Hyperliquid’s interest in attracting financial institutions highlights the gap between technological capability and institutional readiness. On-chain markets may offer continuous operation, programmable settlement and transparent transaction states. Those features can be relevant to banks, funds, market makers and other professional participants, but they do not replace established controls around client identification, asset segregation, collateral, risk limits and incident response.
An institution operating an on-chain market would still need to address who is permitted to access the venue, how customer assets and trading collateral are handled, how abnormal activity is detected and how disputes are resolved. It may also need to explain how the system responds to outages, smart-contract vulnerabilities, governance changes or a breakdown in liquidity.
Cross-border exposure adds another layer of complexity. The location of the customer, the legal status of the product, the location of the service provider and the jurisdiction in which the infrastructure is operated may all affect the applicable rules. A blockchain’s global accessibility does not necessarily remove those territorial obligations.
This is particularly important for derivatives. Derivatives markets can involve leverage, liquidation procedures, margin requirements and counterparty risks that are different from those associated with spot transactions. Even if execution and settlement occur on a public network, regulators may still focus on the entities that design the product, solicit users, manage the market and determine how losses are allocated.
U.S. policy remains unsettled
The source material indicates that U.S. regulators have not fully accepted the proposition that a decentralized network should be insulated from direct scrutiny simply because its infrastructure is distributed. Regulators may seek to apply a substance-over-form approach, examining whether identifiable parties are materially involved in maintaining or organizing the market.
At the same time, policymakers are still working through how offshore platforms and decentralized derivatives infrastructure should fit within the existing framework. The issue involves competing objectives: protecting customers and market integrity, preserving the enforceability of financial rules, and avoiding a system in which every developer or infrastructure provider is treated as a traditional exchange operator.
TechFlow’s report refers to further congressional and regulatory review of the treatment of decentralized derivatives markets. Those discussions should be understood as part of an ongoing policy process rather than as a settled legal determination. The eventual outcome could depend on legislative language, agency interpretations, enforcement priorities and the specific operating model of each platform.
Implications for custody and market infrastructure
If regulated institutions begin operating defined markets on public blockchains, custody and control systems will become an important bridge between traditional finance and decentralized infrastructure. Institutions may require clear separation between client assets, collateral and protocol liquidity, as well as auditable permissions, transaction approval workflows and operational safeguards.
Digital-asset custodians and institutional wallet providers could therefore face more complex requirements when supporting these activities. They may need to manage multiple authorization layers, policy controls, settlement instructions and audit trails. Whether those arrangements satisfy a regulator would depend on the product, the client base, the relevant jurisdiction and the actual distribution of operational responsibility; it cannot be inferred from technical design alone.
The broader significance of Hyperliquid’s position is that it frames regulation as a question of functional responsibility. The proposed model would place obligations on institutions that visibly operate markets and interact with customers, while preserving the blockchain as an open infrastructure layer. Whether that distinction becomes workable will depend on how regulators define control, intermediation and market operation.
For now, the most consequential question is not whether a network describes itself as decentralized. It is who designs the market, controls its critical functions, provides services to users and bears responsibility when those functions fail. That question is likely to remain central as decentralized derivatives platforms pursue institutional participation and regulators decide how existing financial rules should apply to on-chain markets.
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