Lawmakers’ counter-proposal could impose severe restrictions on decentralized finance, with critics warning it may “kill DeFi” in the U.S.
A new proposal from Democratic senators has sparked intense backlash across the crypto industry, with critics warning that it could effectively ban decentralized finance (DeFi) in the United States. The move comes as Democrats reportedly introduced a counter-proposal to the bipartisan crypto market structure bill, seeking to tighten controls on DeFi applications and developers.
“It’s so bad. It doesn’t regulate crypto — it bans crypto,” said Jake Chervinsky, a prominent crypto lawyer. “This is less of a regulatory framework and more of an unconstitutional government takeover of an entire industry.”
Democrats Push for Stricter DeFi Oversight
According to Punchbowl News, the proposal from Senate Banking Committee Democrats calls for imposing Know Your Customer (KYC) rules on the frontends of crypto apps, including non-custodial wallets. The draft also suggests giving the U.S. Treasury Department the authority to create a “restricted list” of DeFi protocols it deems “too risky.”
Crypto advocates argue that such measures would stifle innovation and effectively criminalize legitimate decentralized platforms.
The counter-proposal reportedly strips legal protections for crypto developers, potentially exposing them to prosecution for building open-source software. Gabriel Shapiro, founder of MetaLeX Labs, warned that U.S. citizens earning recurring revenue from protocols on the “restricted list” could face penalties.
The Democrats behind the proposal reportedly include Mark Warner, Ruben Gallego, Andy Kim, Raphael Warnock, Angela Alsobrooks, and Lisa Blunt Rochester.
Critics say the move undermines bipartisan momentum built around the CLARITY Act, which passed the House in July with strong cross-party support.
Industry Organizations Condemn Proposal
The Digital Chamber of Commerce and other advocacy groups swiftly criticized the proposal for its potential to push innovation overseas.
“Good policy doesn’t punish decentralization,” said Zunera Mazhar, vice president of government and policy affairs at the Digital Chamber. “It protects consumers, preserves innovation, and targets illicit finance where it actually happens.”
Similarly, Summer Mersinger, CEO of the Blockchain Association, said the proposal would make compliance “impossible” for U.S.-based firms, warning it could drive developers and investors abroad.
The proposed restrictions clash with the Responsible Financial Innovation Act (RFIA) draft introduced in September, which sought to provide clear regulatory boundaries by giving the Commodity Futures Trading Commission (CFTC) oversight over spot markets and limiting the Securities and Exchange Commission’s (SEC) jurisdiction.
While the Trump administration has pledged to make the U.S. the “crypto capital of the world,” this counter-proposal signals a potential reversal of that trajectory — one that industry voices say could cripple America’s competitiveness in blockchain innovation.
“If decentralization is punished instead of protected,” Mazhar warned, “the U.S. risks losing its place at the forefront of the digital economy.”
Disclaimer
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