Senate Democrats Crypto Proposal Threatens DeFi Regulation According to Industry Experts

The cryptocurrency industry is reacting strongly to a leaked document outlining U.S. Senate Democrats' proposed approach to regulating decentralized finance (DeFi). The detailed proposal, first reported by Politico, suggests requiring any entity handling customer interactions in DeFi operations to register with the SEC or CFTC as regulated brokers. According to Jake Chervinsky, Chief Legal Officer at Variant, the regulatory language appears so broad it could encompass "everyone in crypto." He characterized the proposal as "fundamentally broken and unworkable" and suggested it seems designed to derail legislative progress rather than serve as a starting point for negotiation. Summer Mersinger of the Blockchain Association, a former CFTC commissioner, warned the proposal "would effectively ban decentralized finance, wallet development and other applications in the United States." She emphasized the language is "impossible to comply with" and would push innovation overseas while urging policymakers to continue negotiations. The proposal aims to empower Treasury Department, market regulators and the Federal Reserve to target bad actors by identifying parties responsible for DeFi activities, broadly defined as anyone involved with DeFi front-end operations. However, it excludes "sufficiently decentralized" protocols that don't generate profits from regulation. Software developers would receive liability protection for open-source creations unless they profit from operating the technology, addressing a key concern in the DeFi space. Meanwhile, House representatives are urging the Senate to adopt their previously passed Digital Asset Market Clarity Act as a template rather than starting anew. Senate legislation requires bipartisan support to meet the 60-vote threshold, with Democratic allies seeking significant changes to previous Republican drafts before endorsing any crypto market structure legislation.