Senate Democrats’ DeFi Regulation Proposal Stuns Industry

A leaked Senate DeFi plan from Democrats has sparked a major fight in Washington. Lawmakers, lobby groups and DeFi advocates warn the draft could choke decentralized finance and stall market talks.

Senate leak sparks outcry

A leaked DeFi regulation proposal from a group of Senate Democrats has set off sharp criticism from crypto lawyers, industry groups and Republicans. Prominent policy voice Jake Chervinsky posted a detailed thread saying the draft treats nearly everyone who helps a DeFi project as an “intermediary,” which would push many teams offshore or shut them down.

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Senate Banking Committee Democrats sent a proposal to Republicans on that committee, as reported by Punchbowl News' Brendan Pedersen and Crypto In America's Eleanor Terrett, aimed at regulating DeFi.

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What the draft would do

According to the report, the Democratic counter-proposal would let the Treasury create a “restricted list” of protocols or front-ends it finds risky. The plan also appears to require front-end services — even non-custodial wallets and UI hosts — to collect user identity data and perform broad surveillance to stop illicit finance. Critics call this a de facto ban on many services.

Why this matters for Cryptomarket structure talks

Lawmakers had been negotiating a bipartisan digital asset market structure bill that would follow the House’s CLARITY Ac t, passed by a 294–134 vote in July. The House measure aimed to clarify when tokens are securities and to create a clearer path for regulated markets. The Senate must now draft its own version and needs 60 votes to pass. The new Democratic text risks scaring off Republican support and delaying a markup or vote.

Industry reaction and legal worry

Top crypto lawyers warn the proposal would make ordinary development work criminal if the Treasury deems a protocol “restricted.” Jake Chervinsky said the draft treats “control of funds” as irrelevant and could force all U.S. DeFi teams to choose between moving abroad or shutting down. The industry says this approach would chill innovation and create legal risk without clear standards.

How this connects to recent bills

This episode follows months of legislative activity: the House CLARITY Act passed in July, and separate bills on stablecoins and fintech drew attention this year. Senate negotiators had been working on a balanced market structure path that could protect consumers while keeping it alive. The leaked papers now reopens old fights over federal agencies’ power and how to define decentralization.

Possible next steps

Senate leaders will likely pause and review the draft while staffers from both parties and industry groups press for changes. The markup date could slip further. If the Senate keeps the “restricted list” idea, expect heavy lobbying, legal challenges and intense public comment from crypto firms and civil-liberties groups.

Bottom line

The leaked DeFi regulation proposal has turned a fragile negotiation into a public fight. If the draft stays as reported, it could end bipartisan momentum and reshape which projects survive in the U.S. The coming days will tell whether senators revise the text or dig in — and whether market structure reform can survive this setback.