Democrats Redefine Crypto Rules to Spark Innovation, Not Just Regulation

Democrats have introduced a new regulatory framework aimed at reinforcing the U.S. approach to digital assets and countering the regulatory influence of Donald Trump’s crypto policies. The framework seeks to establish clarity in the roles of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), while also addressing the regulatory gaps left by the previous administration’s enforcement-driven strategy. The initiative aligns with the broader goal of positioning the U.S. as a global leader in digital asset innovation and financial technology.

A newly revised draft of the Responsible Financial Innovation Act of 2025 outlines key elements of this framework. It proposes a clear division of responsibilities between the SEC and CFTC, including the establishment of a Joint Advisory Committee on Digital Assets composed of members from both agencies. This committee would provide nonbinding recommendations that both agencies are required to publicly respond to, promoting transparency and regulatory coordination. The act also aims to reduce regulatory overlap and unnecessary friction while supporting innovation in the crypto space.

The framework introduces specific protections for developers and participants in the decentralized finance (DeFi) sector. Under the proposed bill, developers, validators, liquidity providers, wallet builders, and infrastructure contributors would not automatically be subject to traditional financial regulations, provided the underlying protocols are not centrally controlled. This provision is intended to address concerns raised by the Tornado Cash case, where legal actions blurred the line between software development and criminal liability, prompting alarm in the developer community.

Furthermore, the bill seeks to clarify the regulatory status of common crypto activities. Airdrops, staking rewards, and liquid-staking outputs are defined as “gratuitous distributions,” meaning they would not be considered securities offerings under current law. This would shield users from unintended legal exposure and provide greater certainty for market participants. The framework also extends protections to emerging blockchain sectors, such as Decentralized Physical Infrastructure Networks (DePINs), which have received specific treatment under federal law for the first time.

The President’s Working Group on Digital Asset Markets has emphasized the importance of a clearly defined taxonomy for digital assets to guide regulatory oversight. The group has categorized digital assets into three main categories: security tokens, commodity tokens, and tokens for commercial and consumer use. Security tokens include digital assets that function as traditional securities, such as investment contracts or tokenized securities. Commodity tokens, such as Bitcoin and Ether, are regulated by the CFTC, while tokens for commercial use are subject to consumer protection laws. This classification aims to streamline regulatory responsibilities and reduce ambiguity in enforcement.

The initiative also includes cross-border regulatory considerations to facilitate international collaboration and prevent market fragmentation. The CFTC has reaffirmed its longstanding framework for the registration and recognition of non-U.S. exchanges, which can help bring trading activity onshore under U.S. regulations. This approach aligns with the group’s goal of leveraging the U.S. capital markets’ depth and liquidity to reinforce global leadership in digital finance.

In a related development, the SEC and CFTC have launched joint initiatives such as Project Crypto and the Crypto Sprint, aimed at modernizing regulatory frameworks for digital assets. These efforts include public consultations on spot crypto trading and regulatory harmonization between the two agencies. A joint roundtable on September 29 is expected to further discuss regulatory alignment, focusing on areas such as innovation exemptions and DeFi.

The new framework represents a shift from the previous administration’s enforcement-first approach to a more proactive and innovation-friendly strategy. By clarifying regulatory roles and reducing legal uncertainty, the U.S. aims to attract back innovators and entrepreneurs who previously moved to jurisdictions with clearer crypto regulations. The goal is to foster a competitive and resilient digital asset ecosystem while ensuring investor protection and market integrity.