Senate DeFi Rules Threaten U.S. Crypto Supremacy

Senate Democrats have unveiled a controversial proposal to impose stringent regulations on decentralized finance (DeFi) platforms, triggering a backlash from industry leaders and threatening bipartisan efforts to establish a cohesive crypto framework. The plan, shared with Republicans on October 9, 2025, mandates Know Your Customer (KYC) checks for non-custodial wallets and removes legal protections for developers, drawing accusations of effectively banning DeFi in the U.S. . The proposal also grants the Treasury Department authority to create a "restricted list" of high-risk protocols, potentially blocking Americans from using them for profit .

The move has stalled ongoing negotiations between Democrats and Republicans, who had been working toward a bipartisan bill to clarify crypto market structures. Senate Banking Committee Republicans suspended talks, calling the Democratic proposal "incoherent" and a "bad-faith effort" to kill innovation . The House-passed CLARITY Act, which aimed to provide regulatory clarity, now faces uncertainty as the Senate's approach diverges sharply toward enforcement .

Critics argue the proposal's broad mandates could drive DeFi innovation offshore. Jake Chervinsky, a crypto lawyer, called the plan an "unprecedented, unconstitutional government takeover of an entire industry," warning it could "set innovation back years" and undermine U.S. leadership in crypto . Zunera Mazhar of the Digital Chamber echoed concerns, stating the rules use "outdated tools" to combat illicit finance while stifling legitimate development .

The proposal's focus on front-end providers-such as DeFi wallet interfaces and liquidity platforms-has intensified debates over decentralization. Under the draft, these entities would face KYC and anti-money laundering (AML) obligations akin to traditional banks, despite their decentralized nature . This could force users to interact only through compliant front-ends or risk penalties, accelerating a shift to offshore platforms with laxer regulations. Newhedge data shows U.S. crypto exchanges already capture less than 10% of global trading volume, with offshore venues dominating 90% .

While the Democratic plan emphasizes investor protection and national security, it clashes with the GOP's pro-innovation stance. The Republican-backed Responsible Financial Innovation Act (RFIA), introduced in September, sought to shield developers from prosecution and assign crypto oversight to the Commodity Futures Trading Commission (CFTC) . Senate Democrats, however, argue the RFIA lacks sufficient safeguards against financial crime. Ruben Gallego, a lead negotiator, defended the proposal as a "substance-driven effort" to build consensus, though Republicans dismissed it as a "nonstarter" .

The regulatory rift comes as global frameworks evolve. The U.S. GENIUS Act, passed in May 2025, established rules for stablecoins but left DeFi largely unaddressed . Meanwhile, the European Union's Markets in Crypto-Assets (MiCA) regulation, fully implemented in 2025, provides a clearer path for decentralized protocols while prioritizing compliance . Industry leaders warn that without a balanced approach, the U.S. risks ceding its competitive edge to jurisdictions with more favorable policies .

As the debate intensifies, the crypto sector braces for prolonged legislative gridlock. With a government funding deadline approaching and the 2026 election on the horizon, the outcome could reshape the future of DeFi-and America's role in the global digital economy.

Source: [1] Democrats' New DeFi Proposal Sparks Crypto Uproar (https://www.cryptotimes.io/2025/10/10/democrats-new-defi-proposal-sparks-crypto-uproar/)

[2] Will the Senate's leaked DeFi bill drain what's left of US liquidity? (https://cryptoslate.com/will-the-senates-leaked-defi-bill-drain-whats-left-of-us-liquidity/)

[3] S.1582 - 119th Congress (2025-2026): GENIUS Act (https://www.congress.gov/bill/119th-congress/senate-bill/1582)

[5] DeFi Expansion Under New Regulations - Smart Liquidity Research (https://smartliquidity.info/2025/09/10/defi-expansion-under-new-regulations/)

[7] DeFi Regulation 2025: US, EU, and Asia Laws - cryptoquorum.com (https://cryptoquorum.com/defi-regulation-2025-us-eu-and-asia-laws/)

[8] Democrats Propose 'Restricted List' for DeFi Protocols in Bill That ... (https://cryptonews.com/news/democrats-propose-restricted-list-for-defi-protocols-in-bill-that-could-kill-sector/)