Ethereum News Today: Senate DeFi Rules Could Stifle Innovation, Cede U.S. Global Crypto Lead

Coinbase CEO Brian Armstrong has publicly criticized a U.S. Senate Democrats' DeFi regulatory proposal, calling it "bad, plain and simple" and warning it would stifle innovation and prevent the U.S. from becoming the global crypto capital. The proposal, which seeks to classify DeFi front-ends as financial intermediaries under the SEC or CFTC, has drawn sharp industry backlash for its potential to effectively ban decentralized finance and wallet development within the country. Armstrong shared a statement from Blockchain Association CEO Summer Mersinger, who described the proposal as "impossible to comply with" and a direct threat to the DeFi ecosystem Gate^[1].

The proposal mandates Know-Your-Customer (KYC) requirements for non-custodial wallets, designates DeFi developers as financial intermediaries, and grants the Treasury Department unchecked authority to create a "restricted list" of protocols. Critics argue these measures would force developers to relocate overseas, undermining U.S. leadership in the space. Crypto legal expert Jake Chervinsky labeled the proposal a "crypto ban," emphasizing its broad definition of intermediaries could criminalize open-source developers Smart Liquidity Research^[4].

The backlash has stalled bipartisan negotiations on broader crypto legislation. Senate Banking Committee Republicans paused talks until Democrats agree to schedule a markup session for the bill, citing the proposal as an "incoherent policy idea." The dispute has deepened partisan divides, with Senate Democrats accusing Republicans of leaking private communications and "crashing out" of discussions. This contrasts with the House's July passage of the CLARITY Act, which established a clearer jurisdictional framework for Bitcoin and Ethereum under the CFTC Smart Liquidity Research^[4].

Market reactions have been mixed. Coinbase shares rose 1.59% amid optimism for regulatory clarity, but DeFi tokens like Ethereum (ETH), Solana (SOL), and Cardano (ADA) remain sensitive to regulatory uncertainty. ETH, trading at $4,343.96, has surged 46.54% over 90 days, reflecting ongoing investor interest despite risks MEXC^[2].

The proposal's regulatory approach mirrors broader 2025 legislative trends, including the GENIUS Act, which mandates 1:1 reserve backing for stablecoins and regular audits. While these laws aim to enhance transparency, they also raise concerns about compliance burdens for smaller DeFi projects. Privacy advocates warn that KYC and transaction reporting requirements could erode the decentralized ethos of the sector, though zero-knowledge proofs and decentralized identity solutions are being explored to balance compliance with anonymity .

Legislative efforts to define DeFi's regulatory boundaries continue to evolve. The Senate's Responsible Financial Innovation Act (RFIA) includes protections for DeFi developers, exempting protocols not controlled by a single entity from securities laws. However, the bill faces hurdles in reconciling with the House's CLARITY Act and addressing unresolved issues like tax treatment and cross-border compliance .

Armstrong emphasized that Coinbase remains committed to engaging with Congress to "get it right," acknowledging the complexity of balancing innovation with oversight. The outcome of these debates will likely shape the trajectory of the U.S. crypto industry, determining whether it remains a global leader in DeFi or cedes ground to more accommodating jurisdictions.