Despite previously supporting a crypto market structure bill, several Democratic US senators have reportedly introduced a counter-proposal that could see decentralized finance protocols placed on a “restricted list” if deemed too risky.
This move, among others they proposed, could “kill DeFi” or move it offshore from the US, according to critics.
The Senate Banking Committee Democrats sent a proposal to the committee’s Republicans on Thursday seeking to impose Know Your Customer rules on the frontends of crypto apps — including non-custodial wallets — and to strip protections from crypto developers, Punchbowl News reported on Thursday.
Crypto lawyer Jake Chervinsky said the counter-proposal could kill any chance of establishing a crypto market structure framework, noting that it could undermine the bipartisan support the CLARITY Act had already secured in the House in July, where it passed 294-134.
“It’s so bad. It doesn’t regulate crypto, it bans crypto,” Chervinsky said, pointing to a suggested measure permitting the Treasury Department to create a “restricted list” for DeFi protocols it considers too risky.
Any US national who uses those protocols and makes “recurring revenues” from them may also face punishment, said the founder and president of MetaLeX Labs, Gabriel Shapiro.
Chervinsky said the proposal seemed less like a regulatory framework and more like an “unprecedented, unconstitutional government takeover of an entire industry.”
”It’s not just anti-crypto, it’s anti-innovation, and a dangerous precedent for the entire tech sector.”
The Democrats behind the counter-proposal include Mark Warner, Ruben Gallego, Andy Kim, Reverend Raphael Warnock, Angela Alsobrooks and Lisa Blunt Rochester, according to Chervinsky.
The move, which comes amid a government shutdown, could be seen as reversing regulatory momentum built under the Trump administration, which has pledged to make the United States the “crypto capital of the world.”
Counter-proposal undermines bipartisan RFIA draft
It also clashes with aspects of the Senate Banking Committee’s Responsible Financial Innovation Act draft on Sept. 9, a bipartisan effort that seeks to assign the Commodity Futures Trading Commission oversight of spot markets and reduce the Securities and Exchange Commission’s overreach.
RFIA also seeks to offer more robust protections to crypto developers to ensure they can build without fear of being prosecuted, amid the Tornado Cash and Samourai Wallet devs in recent months.
Good policy doesn’t punish decentralization: Digital Chamber
Digital Chamber’s vice president of government and policy affairs, Zunera Mazhar, described the measures as heavy-handed and ineffective, adding that they risk pushing innovation offshore instead of addressing the real risks involved.
Related: Democrats press bank regulator on Trump stablecoin conflicts
Instead, Mazhar said the Democrats should target the “real chokepoints” where illicit finance occurs with a risk-based approach that doesn’t crush innovation and create regulatory uncertainty.
“Good policy doesn’t punish decentralization. It protects consumers, preserves innovation, and fights illicit finance where it actually happens.”
Blockchain Association CEO Summer Mersinger agreed with Mazhar’s take, adding that the proposal would make compliance impossible for industry players in the US.
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