Despite previously supporting the cryptocurrency market structure bill, several Democratic U.S. Senators have reportedly proposed a counter-proposal that could place decentralized finance protocols on a "restricted list" if deemed too risky.
Critics argue that this move, along with other measures they have proposed, could "stifle DeFi" or drive it overseas.
According to Punchbowl News on Thursday, Senate Banking Committee Democrats sent a proposal to the committee's Republicans seeking to implement Know Your Customer (KYC) rules on the front end of cryptocurrency applications—including non-custodial wallets—and strip protections from cryptocurrency developers.
Cryptocurrency lawyer Jake Chervinsky stated that this counter-proposal could kill any chance of establishing a cryptocurrency market structure framework and pointed out that it could undermine the bipartisan support the CLARITY Act has gained in the House, which passed in July with a vote of 294 to 134.
"This is terrible. It’s not regulating cryptocurrency; it’s banning cryptocurrency," Chervinsky said, highlighting a proposed measure that would allow the Treasury to create a "restricted list" for DeFi protocols it considers too risky.
Gabriel Shapiro, founder and president of MetaLeX Labs, noted that any U.S. citizens using these protocols and earning "recurring income" from them could also face penalties.
Chervinsky remarked that this proposal does not appear to be a regulatory framework but rather "an unprecedented, unconstitutional government takeover of the entire industry."
According to Chervinsky, the Democrats supporting this counter-proposal include Mark Warner, Ruben Gallego, Andy Kim, Reverend Raphael Warnock, Angela Alsobrooks, and Lisa Blunt Rochester.
This initiative comes during a government shutdown and could be seen as a reversal of the regulatory momentum established by the Trump administration, which promised to make the U.S. the "world capital of cryptocurrency."
It also conflicts with certain aspects of the Senate Banking Committee's Responsible Financial Innovation Act (RFIA) draft from September 9, a bipartisan effort aimed at designating the Commodity Futures Trading Commission (CFTC) as the regulator for the spot market and reducing the overreach of the Securities and Exchange Commission (SEC).
The RFIA also seeks to provide stronger protections for cryptocurrency developers, ensuring they can develop without fear of being sued, a response to the recent cases involving Tornado Cash and Samourai Wallet developers.
Zunera Mazhar, Vice President of Government and Policy Affairs at the Digital Chamber, described these measures as heavy-handed and ineffective, adding that they risk pushing innovation overseas rather than addressing the real risks involved.
Instead, Mazhar suggested that Democrats should target the "real bottlenecks" of illegal finance and adopt a risk-based approach that does not stifle innovation and create regulatory uncertainty.
Summer Mersinger, CEO of the Blockchain Association, agreed with Mazhar, adding that the proposal would make it impossible for U.S. industry participants to comply.
Related: Congressman Steil: Despite government shutdown, market structure bill is still on track
Original article: “Democratic Senators Propose 'Restricted List' for DeFi Protocols, Sparking Strong Backlash”
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