A group of Democratic senators has introduced a controversial counter-proposal targeting the U.S. crypto market. This new legislative push could place decentralized finance (DeFi) protocols on a government “restricted list” if deemed too risky, a move that has alarmed industry experts and legal analysts.
The proposal, which was sent to Republican members of the Senate Banking Committee, is being viewed as a direct challenge to the previously bipartisan momentum behind the CLARITY Act — a bill aimed at creating a balanced regulatory framework for digital assets.
KYC Rules for DeFi and Non-Custodial Wallets Raise Red Flags
At the heart of the new proposal is a plan to extend Know Your Customer (KYC) obligations to a wide range of crypto applications, including non-custodial wallets — tools that allow users to control their crypto assets without relying on intermediaries. This expansion could force developers to include invasive identity checks in apps traditionally built around privacy and decentralization.
Legal protections for developers would also be scaled back. Critics argue that the proposal could treat code creators as financial service providers, potentially holding them liable for how their open-source software is used — even if they have no control over it.
Jake Chervinsky, a well-known legal expert in the crypto space, warned that this approach “could jeopardize the bipartisan support” that helped the CLARITY Act clear the House. He went so far as to describe the counter-proposal as a “potential ban on crypto rather than a form of regulation,” especially since it would allow the U.S. Treasury to unilaterally label DeFi protocols as “risky” and restrict their usage.
Industry Fears DeFi Could Be Driven Offshore
Crypto industry leaders and developers are sounding the alarm, arguing that overly aggressive regulation could cripple innovation or push DeFi projects overseas, where regulatory environments may be more favorable. By treating open-source developers and DeFi protocols like traditional financial institutions, the U.S. risks stifling a sector that has become a global leader in blockchain technology.
Many also see this move as a step backward. The counter-proposal appears to reverse progress made under previous administrations, especially the Trump-era guidance, which focused more on fostering innovation than restriction. It also runs counter to the Responsible Financial Innovation Act, a bipartisan bill that aims to establish clear rules and protections for crypto participants without hampering innovation.
As the crypto space waits to see how the Senate responds, all eyes are on whether the CLARITY Act can survive this latest challenge. For now, the future of DeFi regulation in the U.S. remains uncertain — and increasingly politicized.
