Democratic senators are facing backlash following their introduction of a counter-proposal that could impose a restrictive framework on decentralized finance (DeFi) protocols. Critics claim that this proposal threatens the viability of DeFi in the US.
The senators suggested that protocols could be placed on a ‘restricted list’ based on risk assessments, potentially leading to significant limitations on their operations. This proposal was presented to Republican members of the Senate Banking Committee. The suggested rules could apply Know Your Customer (KYC) regulations to numerous crypto applications, a shift from earlier supportive attitudes towards a more structured crypto market approach.
Jake Chervinsky, a known crypto lawyer, voiced concerns about the proposal’s implications, arguing that it may jeopardize the bipartisan support achieved for the CLARITY Act. He described the proposal as a potential ban on crypto rather than a regulatory solution.
“It’s so bad. It doesn’t regulate crypto; it bans crypto,” Chervinsky remarked, indicating a measure that would allow the Treasury to establish a restricted list for DeFi protocols viewed as overly dangerous.
Concerns also arose regarding individuals profiting from these protocols facing penalties. Gabriel Shapiro discussed the severe consequences of this measure.
The senators spearheading the proposal include Mark Warner, Ruben Gallego, Andy Kim, Reverend Raphael Warnock, Angela Alsobrooks, and Lisa Blunt Rochester.
This initiative could counter previous regulatory progress made during the Trump administration, aiming to position the US as the leading hub for cryptocurrency innovation.
Reflection on Bipartisan Efforts
The suggested counter-proposal contradicts elements of the Responsible Financial Innovation Act draft, which aims to enhance market supervision and offer greater protections to crypto developers.
Zunera Mazhar from the Digital Chamber criticized the counter-proposal as a heavy-handed approach, likely to drive innovations offshore. She stressed the importance of locating the actual points of illicit financing rather than punishing decentralized finance.
“Good policy doesn’t punish decentralization. It protects consumers, preserves innovation, and fights illicit finance where it actually happens,” Mazhar stated.
Summer Mersinger from the Blockchain Association echoed Mazhar’s concerns, asserting that the proposed legislation would complicate compliance for U.S. industry participants.
