TL;DR
- Democratic proposal: Senate Democrats introduced a plan allowing the Treasury to create a “restricted list” of risky DeFi protocols, imposing KYC rules and penalties on U.S. users.
- Industry backlash: Leaders from the Blockchain Association, Digital Chamber, and Coinbase warned the draft would push DeFi innovation offshore and hinder U.S. competitiveness.
- Bipartisan collapse: The proposal clashed with the RFIA draft, prompting Republicans to suspend negotiations and leaving the future of crypto legislation uncertain.
Senate Democrats have introduced a counter-proposal allowing the Treasury Department to create a “restricted list” of DeFi protocols deemed too risky, halting bipartisan negotiations on crypto market structure legislation. The move has sparked sharp criticism from Republicans and industry leaders, who warn it could cripple innovation and derail efforts to establish a regulatory framework.
Democrats’ Counter-Proposal Sparks GOP Walkout
The Democratic plan would impose Know Your Customer requirements on DeFi crypto app frontends, including non-custodial wallets, while removing protections for developers. It could also penalize U.S. nationals generating recurring revenue from restricted protocols. Republicans immediately suspended talks, with Senate Banking Committee staff calling the proposal incoherent and unserious.
Crypto lawyer Jake Chervinsky warned the measure could undermine bipartisan progress, describing it as an “unprecedented, unconstitutional government takeover” that effectively bans crypto rather than regulates it.
Industry Leaders Warn of Offshore Flight
Industry voices reacted strongly, arguing the proposal would drive innovation abroad. Blockchain Association CEO Summer Mersinger said compliance would be “impossible,” pushing development overseas. Digital Chamber Vice President Zunera Mazhar criticized the draft for granting the Treasury sweeping authority while mischaracterizing decentralization. Coinbase CEO Brian Armstrong echoed these concerns, calling it “a bad proposal, plain and simple” that would prevent the U.S. from becoming a global crypto and DeFi hub.
Clash With Bipartisan RFIA Draft
The counter-proposal directly conflicts with the Senate Banking Committee’s Responsible Financial Innovation Act draft released in September. That bipartisan framework sought to assign the CFTC oversight of spot markets while limiting the SEC’s reach. Importantly, it protected DeFi developers, ensuring they could build without fear of prosecution following high-profile cases involving Tornado Cash and Samourai Wallet.
Negotiations Collapse Amid Political Tensions
The dispute has exposed deep partisan divides. Democrats argue they provided substance as requested, accusing Republicans of leaking the proposal and feigning outrage. Republicans counter that Democrats failed to deliver legislative text despite repeated requests since June.
Senator Ruben Gallego leads a group of crypto-friendly Democrats pushing for compromise, but faces resistance from colleagues like Elizabeth Warren, who remains a staunch crypto critic. With Republicans suspending talks, the path forward for landmark crypto legislation this year appears increasingly uncertain.
