After initially endorsing a crypto market structure bill, several Democratic Senators have introduced a counter-proposal that could place decentralized finance protocols on a “restricted list” if they are considered too risky.
This development, among others, is believed to potentially “kill DeFi,” according to critics.
The Senate Banking Committee Democrats submitted a proposal to the committee’s Republicans on Thursday, proposing the implementation of Know Your Customer rules for the frontends of crypto applications — including non-custodial wallets — and removing protections for crypto developers, as reported by several industry analysts, referencing a report from Punchbowl News.
Among these analysts, crypto lawyer Jake Chervinsky stated that the counter-proposal could extinguish any prospect of establishing a crypto market structure framework, emphasizing its potential to weaken the bipartisan support garnered by the CLARITY Act, which previously passed in the House 294-134 in July.
“It’s so bad. It doesn’t regulate crypto, it bans crypto,” Chervinsky remarked, highlighting a proposed measure allowing the Treasury Department to establish a “restricted list” of DeFi protocols deemed too risky, criminalizing their use.
Chervinsky further noted: “This proposal is less a regulatory framework and more an unprecedented, unconstitutional government takeover of an entire industry. It’s not just anti-crypto; it’s anti-innovation, setting a dangerous precedent for the entire tech sector.”
The Democratic Senators behind the counter-proposal include Mark Warner, Ruben Gallego, Andy Kim, Reverend Raphael Warnock, Angela Alsobrooks, and Lisa Blunt Rochester, according to Chervinsky.
This initiative, which arises during a government shutdown, could be perceived as a reversal of the regulatory momentum established during the Trump administration, which aimed to position the United States as the “crypto capital of the world.”
Counter-proposal undermines bipartisan RFIA draft
It also contradicts elements of the Senate Banking Committee’s Responsible Financial Innovation Act draft, released on Sept. 9, a bipartisan initiative designed to delegate oversight of spot markets to the Commodity Futures Trading Commission and limit the Securities and Exchange Commission’s overreach.
RFIA also aims to provide stronger protections for crypto developers to enable them to innovate without fear of prosecution, particularly in light of recent cases involving Tornado Cash and Samourai Wallet developers.
Good policy doesn’t punish decentralization: Digital Chamber
Digital Chamber’s vice president of government and policy affairs, Zunera Mazhar, characterized the measures as overly aggressive and ineffective, warning that they might drive innovation abroad instead of addressing actual risks.
Related: Democrats press bank regulator on Trump stablecoin conflicts
Instead, Mazhar suggested that Democrats should focus on the “real chokepoints” where illicit finance occurs with a risk-based strategy that fosters innovation and mitigates regulatory uncertainty.
“Good policy doesn’t punish decentralization. It protects consumers, preserves innovation, and combats illicit finance where it actually occurs.”
This is a developing story, and further information will be added as it becomes available.
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