Senate DeFi Rules Could Drive $1T Overseas, Jeopardize U.S. Leadership

Coinbase CEO Brian Armstrong has warned that a proposed U.S. Senate regulation targeting decentralized finance (DeFi) platforms would prevent the United States from becoming the "crypto capital of the world." The proposal, advanced by Democratic senators, seeks to classify DeFi front-end service providers as brokers under existing financial regulations, requiring them to comply with securities and commodities trading rules. Armstrong described the measure as a "bad proposal" that would "set innovation back" and drive DeFi development overseas .

The proposal, first reported by Politico, outlines a framework where entities facilitating access to DeFi platforms-such as developers, operators, or profiting parties-would be required to register with the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC) as brokers . Critics argue that this approach misaligns with DeFi's decentralized nature, where platforms often lack centralized control over user data or transaction reporting capabilities. The Blockchain Association, a prominent crypto advocacy group, labeled the proposal a "ban on DeFi," warning it would "effectively ban decentralized finance, wallet development, and other applications in the United States" .

The proposal's potential impact extends beyond regulatory compliance. Industry leaders and analysts have raised concerns about capital flight, with estimates suggesting that restrictive rules could push $1 trillion in DeFi-related liquidity to offshore jurisdictions. Summer Mersinger, CEO of the Blockchain Association, emphasized that the language of the proposal is "impossible to comply with" and would "drive responsible development overseas." Coinbase's Armstrong echoed these concerns, stating the proposal would "prevent the U.S. from becoming the crypto capital of the world" .

The regulatory debate reflects broader tensions in Washington over balancing innovation with oversight. While the Senate's recent bipartisan repeal of the IRS's DeFi broker rule under the Congressional Review Act (CRA) signaled support for crypto-friendly policies, the new DeFi proposal introduces a conflicting regulatory approach. The previous Senate vote, which overturned the IRS rule with a 70-27 margin, was hailed as a victory for DeFi developers and U.S. innovation US Senate Overturns IRS Rule for DeFi Brokers^[1]. However, the current proposal, backed by Democratic senators, risks creating a fragmented regulatory landscape that could undermine the sector's growth.

The implications for the U.S. financial system are significant. DeFi platforms underpin global stablecoin flows, on-chain credit, and automated markets, with major U.S. banks like Goldman Sachs and Citigroup already exploring blockchain-based settlement systems. Analysts warn that strict DeFi regulations could create a two-tier financial system, where Wall Street captures permissioned blockchain solutions while DeFi innovation migrates offshore, leaving American startups and retail investors at a disadvantage .

The proposal also faces political challenges. Republican members of the Senate Banking Committee have criticized the measure as "unworkable," with one committee spokesperson calling it "not a good-faith effort to engage on market structure." The House of Representatives has already passed the Digital Asset Market Clarity Act, but Senate Democrats and Republicans remain divided over how to allocate regulatory authority between the SEC and CFTC .