DeFi Groups Urge Senate to Avoid Overregulating Decentralized Finance

The DeFi Education Fund (DEF), supported by early Uniswap grants, has urged the U.S. Senate Banking Committee to adopt a more cautious approach to regulating decentralized finance (DeFi). In a formal response to the draft Responsible Financial Innovation Act of 2025 (RFIA), DEF and a coalition of leading crypto firms, including a16z Crypto, Jito Labs, Jump Crypto, and Uniswap Foundation, proposed a regulatory framework designed to protect innovation while maintaining national security and consumer protections [1].

The group emphasized the need to differentiate DeFi developers from traditional financial intermediaries, warning that existing regulations risk criminalizing non-custodial software. They argued that treating code as a financial service could create a dangerous precedent, particularly highlighted by the ongoing federal case against Tornado Cash developer Roman Storm [1]. The letter stated that “software that does not take custody or control should not be regulated as an intermediary,” calling for legislative clarity to avoid unintended consequences [1].

The DEF outlined four key pillars for regulatory reform: distinguishing between developers and intermediaries, defining which entities require federal registration, establishing clear decentralization criteria, and ensuring technology-neutral rulemaking. These proposals come as the Senate seeks public feedback on the RFIA, which builds upon the earlier CLARITY Act [1].

The coalition also stressed the importance of federal preemption to prevent state-level fragmentation that could be exploited by traditional financial institutions to target DeFi developers. Without a unified federal approach, they warned, emerging competition in the DeFi space could be suppressed [1].

Andreessen Horowitz (a16z) echoed similar concerns, urging lawmakers to revise the draft bill to address legal uncertainties, particularly around the classification of "ancillary assets." The firm warned that the current framework could create legal loopholes and undermine investor protections by conflicting with the Howey test, a longstanding standard for determining whether an asset qualifies as a security [1]. a16z supported the CLARITY Act’s narrower definition of "digital commodities" and proposed a control-based decentralization model to determine when an asset transitions from a security to a commodity [1].

Lawmakers have expressed a desire to balance market growth with financial oversight, but the DEF and a16z argue that a deeper understanding of decentralized systems is essential to avoid stifling innovation. The coalition’s joint letter underscores the urgency of crafting regulations that reflect the unique nature of DeFi while protecting consumers and investors [1].

Source: [1] DeFi Education Fund Urges Senate to Tread Carefully on DeFi Regulation in Joint Letter (https://cryptonews.com/news/defi-education-fund-urges-senate-to-tread-carefully-on-defi-regulation-in-joint-letter/)