In a recent twist on the legislative front, Senate Democrats made waves by presenting a counter-proposal to their Republican counterparts regarding the regulation of DeFi (Decentralized Finance) protocols. This move has caused an immediate halt to ongoing negotiations over the much-anticipated crypto market structure legislation, and the implications could be monumental for the future of cryptocurrency in the United States.
The Democratic proposal aims to empower the Treasury Department to establish a “restricted list” of DeFi projects deemed too risky, a proposition surrounding which the bipartisan discussions have revolved. Notably, this plan includes Know Your Customer (KYC) compliance requirements for crypto application frontends, including non-custodial wallets. Such a shift could strip away protections for developers and impose punitive measures on U.S. citizens engaging with restricted protocols. The situation has ignited a firestorm of criticism and raised concerns about the future of innovation in the crypto space.
In a stark response to the proposal, Senate Republicans swiftly suspended all crypto-related discussions. Catherine Fuchs, the Staff Director for the Senate Banking Committee, expressed in an email that they would not reconvene until an alternative understanding is reached. Critics from the Republican side have branded the Democrats’ counter-proposal as disorganized and poorly formulated, suggesting it lacks the serious intent needed for effective regulation.
Jake Chervinsky, a well-known crypto legal expert, expressed his alarm at the implications of this proposal. In his assessment, it represents an unprecedented encroachment by the government into an entire industry, reclassifying the regulatory framework not as a means of guiding crypto but as a de facto ban. He warned that such measures could stifle the bipartisan momentum behind the CLARITY Act, which had previously garnered significant support in the House, passing with a vote of 294-134 in July. Chervinsky aptly described the Democrats’ approach as a serious deviation from productive dialogue, tweeting, “These Senators claim to be pro-crypto, but what they propose is basically a crypto ban.”
1/ Senate Democrats are trying to kill market structure. A group just sent a counter-proposal to the RFIA and it is deeply unserious. They claim to be pro-crypto, but what they propose is basically a crypto ban. It’s hard to imagine a good deal happening right now 🧵 https://t.co/yL5bDbdCvq— Jake Chervinsky (@jchervinsky) October 9, 2025
Key figures behind the counter-proposal include Senators Mark Warner, Ruben Gallego, and Angela Alsobrooks, reflecting a fractured approach to what was once a potential unifying initiative among bipartisan leaders. The urgency surrounding this legislation is palpable, particularly as the Senate Banking Committee, under the leadership of Chair Tim Scott, aims to push a market structure bill across the finish line before the year’s end. However, the AFL-CIO recently voiced its opposition to the Responsible Financial Innovation Act, reflecting concerns that proposed measures could expose workers’ retirement funds to the notorious volatility of cryptocurrencies while exacerbating systemic financial risks.
Industry experts are particularly alarmed by the implications of the Democratic proposal. Summer Mersinger, CEO of the Blockchain Association, cautioned that such a framework would hinder compliance, effectively leading innovators to migrate abroad. Her stance resonates with many in the industry—advocating for legislation that nurtures rather than stifles American leadership in financial technology.
1/ A new disappointing proposal from Senate Democrats would effectively ban decentralized finance, wallet development, and other decentralized applications in the United States. That’s a nonstarter—and it’s not consistent with America’s long tradition of leading on innovation.…— Summer Mersinger (@SKMersinger) October 9, 2025
Zunera Mazhar, Vice President of the Digital Chamber, shares similar sentiments, highlighting that resorting to outdated tools in an attempt to combat illicit finance dilutes the potential for effective oversight. Her call for a risk-based approach that aligns with international standards underscores the need for the U.S. to adapt its regulatory environment without resorting to heavy-handed definitions that impede innovation.
Among the chorus of dissenting voices is Brian Armstrong, CEO of Coinbase, who simply characterized the proposal as “a bad proposal, plain and simple” that threatens the United States’ aspirations to become the epicenter of cryptocurrency innovation. He asserts that while the proposal may currently be on the table, the process of lawmaking is ongoing and emphasizes a commitment to constructive dialogue with Congress to navigate toward a beneficial resolution.
We absolutely won’t accept this. It’s a bad proposal, plain and simple, that would set innovation back, and prevent the US from becoming the crypto capital of the world. But legislating is a process, and we’re committed to engaging and helping Congress get it right. We will keep… https://t.co/SmHsBgFRoE— Brian Armstrong (@brian_armstrong) October 10, 2025
The ramifications of the Democrats’ counter-proposal stand in stark contrast to the revised draft of the Responsible Financial Innovation Act (RFIA), which aims to place oversight of spot markets under the Commodity Futures Trading Commission while simultaneously curbing the reach of the Securities and Exchange Commission. This draft had espoused protections for DeFi developers, ensuring that they could innovate without the looming threat of legal repercussions following recent high-profile cases targeting developers associated with Tornado Cash and Samourai Wallet.
The negotiations have been marked by contention, particularly surrounding the process and substance of the discussions. According to reports, Democratic spokesperson Jacques Petit emphasized that his party was prepared to reach a compromise, only to find Republicans shutting down discussions prematurely. This friction encapsulates the complexities of the legislative process, revealing deep-seated disagreements over the future direction of crypto regulation in the U.S.
Trump’s SEC Chair spent his career advising big banks and giant corporations. It’s no surprise the SEC is now dropping cases against his Wall Street friends. Just the latest example of how Trump and his Administration are engaging in open corruption on an unprecedented scale. https://t.co/aZD5ardvgl— Elizabeth Warren (@SenWarren) September 25, 2025
As negotiations falter, it remains uncertain what the next steps will be. Senator Gallego stated that Democrats are committed to continuing their efforts, insisting they won’t succumb to artificial timelines while striving for a bipartisan market structure bill. As the landscape evolves, industry participants and enthusiasts alike will be watching closely, hoping for a resolution that fosters innovation while ensuring regulatory compliance in a fast-paced digital age.
To keep up with the latest updates on this unfolding situation and to understand the implications for the future of cryptocurrency, stay tuned to our ongoing coverage and analyses.