DeFi Proposal Stalls Senate Crypto Market Overhaul

Throughout crypto’s regulatory journey in the US, the House has taken the lead on crafting legislation, while the Senate has acted as a battlefield to get it enacted. In line with that, the cryptocurrency framework bill in the Senate is put on hold as policymakers debate amendments.

A counterproposal to the crypto market structure bill was submitted by Democrats in the Senate, which was met with an industry outcry. Following the counterproposal, talks on the bill have been halted until Republicans and Democrats can agree on a markup session. 

Markup is a process by which legislators go through a proposed bill, propose amendments, and revise it. A bill must go through a markup session before it can be reported to the full House or Senate for a floor vote.

The negotiation is currently at an impasse due to the Democrats’ proposal, which seeks to impose numerous regulations on DeFi protocols. 

Decentralized finance (DeFi) is a peer-to-peer system that eliminates third parties and centralized institutions from financial transactions like trading, lending, and borrowing. The aim of DeFi is to create a more open, accessible, and transparent financial system where users can interact directly with each other.

DeFi is a fast-evolving space, currently hosting $154.6 billion in total value locked (TVL).

This decentralized world of finance is largely unregulated, with regulators working on providing more clarity to support growth and innovation.

DeFi Proposal Leaks Stall Senate Crypto Market Structure Talks

While pro-crypto Senate Republicans have been trying to pass a crypto market structure bill before the end of the year, they have been struggling to attract the bipartisan support needed to pass the legislation.

Negotiations between the two parties suffered a setback when Senate Democrats involved in the negotiations sent their first legislative offer last week. 

The counterproposal from Senate Democrats in the Senate Banking Committee seeks to tighten the regulatory scrutiny over DeFi by applying existing securities market requirements to DeFi. 

The DeFi Proposal gives the Treasury a key role in the market structure process, granting it the authority to determine if a protocol is decentralized enough. It also treats any DeFi project whose controllers exercise significant influence over it as a “money-services business.” More importantly, the proposal includes a supposed “restricted list” of protocols that are considered too risky.

The Democrats’ proposal regarding DeFi regulation “was not a legislative offer,” said Jeff Naft, a spokesperson for Senate Banking Chair Tim Scott, in a statement, adding that “the document was not written in legislative text, included multiple incoherent policy ideas, and was not a good-faith effort to engage on market structure.”

And in response to Democrats’ initial provisions on DeFi, the Republicans have put a stop to crypto talks until further notice.

“Until we have an agreed-upon date for markup, we are going to pause any further meetings,” Catherine Fuchs, staff director for Scott (R-S.C.), has been reported as saying by Punchbowl News, which first acquired a copy of the amendments proposed by Democrats.

Meanwhile, Democrats are not happy that their proposal has been revealed to the public.

“Democrats have shown up ready to work, but our Republican counterparts are crashing out. They asked for paper and substance, and we delivered. They then turned around and leaked our proposal and pretended to be surprised that our parties have policy differences.”

– Jacques Petit, a spokesperson for Sen. Ruben Gallego, a Democrat on the digital asset subcommittee

Senate Banking Republicans had vowed to mark up the market-structure bill in September and have been seeking Democrats to settle on a date for a committee vote on the bill. But the Democrats involved in the talks want a bipartisan authorship process and time to negotiate the bill.

Naft, the Scott spokesperson, said that they have been asking for legislative feedback on the draft since late June but haven’t received “any formal, substantive feedback on either of our discussion drafts.” 

Having pushed Sept. 30 as the markup date, “in hopes of bipartisan engagement,” the Chairman has also repeatedly “asked Democrat colleagues to commit to a markup date,” which is necessary to move this legislation forward. “They have yet to commit to a markup date,” Naft added.

For the other side, however, this is “like setting a wedding date before the first date,” as Politico reported the Gallego spokesperson saying.

“It’s nonsensical,” he said. “But this is likely the best they can do to distract from the fact that their caucus is not unified on this issue. Regardless, the 12 Democrats remain committed to negotiating in good faith if and when Banking majority staff determines that they truly want a bipartisan product.”

Further meetings in the Senate Banking Committee’s market-structure negotiations—centered on the RFIA discussion draft—are on hold until the parties agree to a markup date.

RFIA (Senate Draft): What’s In It and Why It’s Stuck

The Senate Banking team released an initial RFIA discussion draft alongside an RFI on July 21, 2025, then circulated an updated draft on Sept. 5, 2025—but it has not been formally introduced.

The following month, US Senator Scott (R-SC), the chairman of the Senate Committee on Banking, Housing, and Urban Affairs, said that he expects the law to pass before September ends. But Scott noted at the time that the market structure bill is “a far more complicated piece of legislation, and the forces against it […] it is a real force to overcome.”

The Republican leadership on the Committee turned its attention to crypto market structure right after passing the GENIUS stablecoin bill. 102 Democrats voted for the Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act.

The GENIUS Act was signed into law by President Donald Trump on July 18. It prioritizes consumer protection, strengthens the US dollar’s reserve currency status, and will “make America the undisputed leader in digital assets, bringing massive investment and innovation to our country.”

Back in June, during a “fireside chat” with Wyoming Senator Cynthia Lummis, Scott stated that for the crypto market “to function completely,” Congress would need to advance legislation on market structure and stablecoins.

And that’s when the Digital Asset Market Clarity Act, or CLARITY Act, was proposed by the House as a market structure bill. It intends to establish more straightforward guidelines for crypto companies operating in the US. The rules may also include clarification on which digital assets qualify as securities and determine whether they fall under the jurisdiction of the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC).

Around mid-July, the Clarity Act passed through the House of Representatives with overwhelming support. House Committee on Financial Services Chairman French Hill (AR-02) called the passing of “landmark legislation” that established a functional regulatory framework for digital assets a “pivotal moment.”

But so far, it hasn’t moved beyond that, though not due to the lack of trying from crypto-friendly lawmakers.

“The Senate must finish the job on America’s pro-crypto future and pass the CLARITY Act.”

– House Majority Whip Tom Emmer, a Minnesota Republican, in a social-media post last month

Amidst this, the Senate created its own separate but similar market structure bill. For this comprehensive bill regulating US crypto firms, Senators from both parties must finish writing and amending it before it’s sent to the Senate Agriculture Committee and the Senate Banking Committee for a sign-off.

Once both Committees have voted to forward the legislation for a floor vote, the entire Senate must vote on it, requiring a 60-vote majority to move. If approved, the bill gets a vote in the House and then is signed into law by the President. 

The draft for the Senate bill, much like the Clarity Act, aims to establish a clear distinction between the labels for digital assets and which agencies should regulate them, addressing the broader crypto industry. 

Earlier last month, an updated discussion draft of the RFIA was released. It defines key terms like ‘digital assets,’ ‘digital commodities,‘ and ‘ancillary assets,‘ and establishes tests to distinguish crypto securities from commodities. The RFIA also authorizes certain banks to engage in crypto activities, provided they are permissible under existing law.

Moreover, the Act would require new anti-money laundering (AML) regulations. To address potential illicit finance violations and emerging risks, it would create a public-private information-sharing pilot program. 

The RFIA draft embraces regulatory innovation by establishing a Sandbox to develop innovative financial products, conducting a study on the regulatory treatment of tokenized real-world assets, and creating a safe harbor for NFTs and DePINs. Federal agencies would also be prohibited from restricting a user’s ability to self-custody digital assets.

The bill hasn’t yet been formally introduced, though. But members of the Senate Banking Committee have said they are bringing it to the amendment stage and setting it for a committee vote. 

Senator John Kennedy (R-LA), however, told reporters last month that he doesn’t think it is ready and that there are still “a lot of questions.“ While the GENIUS Act was important, “it was a baby step,“ Kennedy said. “This is a full leap. And we’ve got to get it right.”

The long-awaited bill will take a lot of time to become law, and even then, it will involve a lengthy process of being interpreted into new regulations that will govern the sector through federal agencies. Regulators like the SEC, CFTC, and FinCEN will then make proposals for the public to comment on, which can take a couple of years.

Industry Pushback: Is the Dems’ DeFi Plan a ‘Ban’?

While the RFAI has been seen by the industry as a serious move toward regulatory clarity, Democrats’ DeFi proposal isn’t.

Experts are actually concerned about the intentions of Democrats behind the proposal and its impact on the cryptocurrency sector. They believe the proposal from Democrats will stall progress on the legal clarity for the blockchain industry.

Jake Chervinsky, chief legal officer of investment fund Variant, called the Democrats’ counterproposal to the RFIA “deeply unserious.“ According to him, what they are proposing is “basically a crypto ban.”

Chervinsky said the proposal is “an unprecedented, unconstitutional government takeover of an entire industry,“ which is not only against crypto but also innovation, and sets “a dangerous precedent for the entire tech sector.”

The “first offer“ in a negotiation from Democrats, he said, is “designed to kill the bill,“ by making everyone in crypto an intermediary, forcing front-end providers to KYC users, giving agencies unchecked power for selective regulation, and authorizing Treasury to ban anything in DeFi.

Blockchain Association CEO Summer Mersinger also shared her disappointment in the proposal outlined by Senate Democrats. It “would effectively ban decentralized finance, wallet development, and other applications in the United States — an outcome that’s neither workable nor consistent with American innovation,“ she said in a statement.

Zunera Mazhar, the vice president of policy at The Digital Chamber, took to X to share her concerns, noting that the law “gives sweeping authority, narrowly defines decentralization, and treats front ends like financial intermediaries.”

Calling the new DeFi draft an ineffective and heavy-handed attempt to “fight illicit finance with outdated tools,“ she said that instead of tackling real issues, it actually risks pushing innovation offshore.

Mazhar proposed better solutions, such as targeting the real chokepoints where illicit finance actually occurs, using risk-based oversight rather than regulating code, building frameworks that protect markets without crushing innovation, and aligning with global standards.

“Good policy doesn’t punish decentralization,“ she added, “It protects consumers, preserves innovation, and fights illicit finance where it actually happens.”

Earlier this week, the Digital Chamber submitted an open coalition letter to Senate Democrats on the DeFi Proposal. A digital asset trade association, the Digital Chamber, has been working on crypto policy and innovation.

In collaboration with industry leaders such as VanEck, Chainlink Labs, Aave Labs, Binance.US, Input Output Group, and more, the association expressed its “strong concern“ in the draft ‘Preventing Illicit Finance and Regulatory Arbitrage Through DeFi Platforms.’

This proposal from Democrats, they noted, would give the Treasury Department the authority to define who “controls“ decentralized software, thus subjecting developers, governance participants, and interface providers to regulation that is designed for traditional intermediaries.

In practice, the framework would treat open-source software like a financial institution and effectively prohibit permissionless innovation by requiring registration for the U.S.-facing DeFi front ends. It will also empower the Treasury to unilaterally place protocols on a “Restricted List,“ barring US persons from interacting with them.

“These provisions would expose core software activity to potential criminal liability and directly contradict the bipartisan principles reflected in the CLARITY Act, which passed the House with overwhelming support,“ reads the statement. 

The letter calls upon lawmakers to revise the proposal to ensure that open-source software and non-custodial participants are exempted from financial institution obligations, define “control“ narrowly and objectively, and establish clear statutory limits and oversight on the Treasury’s designation authority. 

It also recommends not regulating DeFi front ends as intermediated financial services, as they are fundamentally different.

Industry participants urged lawmakers to have a consultation with technologists, developers, and policy experts, so that “America can lead the world in both financial innovation and financial integrity, but only through a framework that distinguishes between those who build technology and those who misuse it.”

What Happens Next for U.S. Crypto Rules?

Under the previous Democratic administration, the SEC significantly increased enforcement against crypto firms. Their enforcement-focused regulatory environment shaped market behavior, leading to projects ceasing operations and a cautious attitude towards crypto.

However, it was also under the Biden administration that the SEC approved Spot Bitcoin (BTC -0.13%) ETFs, materially changing access for institutional and retail investors to Bitcoin via regulated markets.

In a complete reversal, the digital asset industry has been rewarded with several pro-crypto legislation under the current administration, as President Trump delivered on his promises made on the campaign trail to the cryptocurrency market. This includes Trump signing the executive order to support the growth of digital assets and blockchain across the economy by removing unnecessary obstacles and promoting US leadership, setting a pro-crypto tone right from the beginning.

So far this year, the White House has eased supervisory constraints, revoked the accounting guidance to make crypto custody easier and less costly for financial institutions, relaxed barriers in 401(k) plans to buy cryptocurrency, shifted enforcement posture away from prosecuting crypto industry participants, and prohibited the US from issuing a central bank digital currency (CBDC). 

Furthermore, the Trump administration has encouraged the participation of banks and financial institutions in digital asset markets, directed the Treasury to look into building a Strategic Bitcoin Reserve, and is now working on establishing a comprehensive regulatory framework for the market.

Senators are currently locked in a stalemate, though, as Democrats and Republicans struggle to align on key issues. As a result, the Senate Banking Committee has paused digital market structure meetings, putting the passage of the landmark market structure bill at risk.

This is happening while the government is undergoing a shutdown. Recently, Senate Democrats rejected the funding bill to reopen the US government for the 10th time, holding firm in their demand for a guarantee to extend subsidies for health plans before advancing any deal.

Against this background, the fight over the crypto market structure bill reflects the broader political divide in Washington that could ultimately shape the future of the US digital asset ecosystem.

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