Is the U.S. Senate Trying to Ban DeFi? New Proposal Sparks Fierce Backlash

A new draft from Senate Democrats aimed at curbing illicit activity in decentralized finance (DeFi) is already generating pushback not just from crypto advocates but also from Republicans on the Senate Banking Committee.

The proposal, which circulated this week, is now the subject of behind-the-scenes disagreements that could delay broader talks on crypto market structure legislation.

The proposal and its scope

According to reporting from Punchbowl News and Politico, the six-page draft would give the U.S. Treasury Department broad authority to determine when an individual or entity has “control or sufficient influence” over a DeFi protocol.

It would also empower regulators to decide whether a protocol qualifies as “sufficiently decentralized.”

Under the proposed language, anyone who designs, deploys, operates a front-end service, or materially benefits from a DeFi protocol engaged in financial activities could be deemed an “intermediary.”

That definition would extend obligations such as compliance and customer verification to a wide range of developers, liquidity providers, and even governance participants.

Critics argue that such an approach could make it nearly impossible for open-source development to continue within the United States.

Summer Mersinger, CEO of the Blockchain Association, stated that the framework would “effectively ban decentralized finance, wallet development and other applications,” warning it could push innovation offshore.

Political tensions and industry response

The proposal also intersects with ongoing bipartisan negotiations on a market structure bill. The House passed its version, the CLARITY Act, earlier this year, but the Senate has been drafting its own legislation that would require 60 votes to advance.

Republicans on the Banking Committee have been working on the Responsible Financial Innovation Act (RFIA), which industry participants have generally viewed as more favorable to software developers.

Jake Chervinsky, chief legal officer at Variant Fund, called the Democrats’ proposal “unserious,” saying on X that it reads less like a regulatory framework and more like a “crypto ban.”

He added that granting Treasury unchecked power to define influence and restrict protocols could amount to selective regulation with little recourse for industry participants.

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