The proposal, delivered to Republicans on Thursday, would give the Treasury broad authority to define and restrict decentralized finance (DeFi) protocols, effectively requiring KYC compliance even for non-custodial wallets. The measure would also eliminate liability protections for software developers and interface providers, prompting an immediate reaction from the crypto industry and Republican lawmakers.
Republicans suspend negotiations
Talks on a bipartisan crypto market structure bill collapsed shortly after the proposal was shared. Senate Banking Committee Republican Staff Director Catherine Fuchs informed colleagues that all meetings were “paused until an agreed-upon markup date is established,” according to internal communications.
Republican aides criticized the counteroffer for lacking formal legislative text and accused Democrats of stalling. “This is not a framework, it’s an enforcement wish list,” said one GOP staffer.
Crypto lawyer Jake Chervinsky warned that the Democratic proposal could “effectively ban DeFi in the United States” by allowing the Treasury to restrict entire protocols without due process. He called the framework “unprecedented and unconstitutional,” saying it undermines the CLARITY Act, which passed the House in July with strong bipartisan support (294-134).
Industry groups warn of an ‘offshore exodus’
The Blockchain Association called the proposal “a compliance nightmare,” arguing that it would boost DeFi development overseas. CEO Summer Mersinger said the approach “treats software like a financial intermediary” and “makes legal innovation nearly impossible.”
Similarly, Digital Chamber vice president Zunera Mazhar criticized the plan for “trying to fight illicit finance with outdated tools,” saying policymakers should focus on “real choke points where money laundering occurs” rather than regulating open source code.
Coinbase CEO Brian Armstrong joined the criticism, calling the plan “a bad proposal that would slow innovation and drive the next generation of financial technology overseas.”
Clash with existing bipartisan efforts
The counterproposal directly conflicts with the Responsible Financial Innovation Act (RFIA), a bipartisan draft introduced in September that assigns oversight of the spot market to the Commodity Futures Trading Commission (CFTC) and clarifies that DeFi developers cannot be prosecuted simply for publishing code.
The RFIA, championed by Senate Banking Chairman Tim Scott (R-SC) and Senator Kirsten Gillibrand (D-NY), was intended to balance oversight between the CFTC and the SEC while protecting American innovation. Democrats’ new proposal, by contrast, centralizes authority within the Treasury Department and expands its enforcement powers.
Crypto Talks Fail Over DeFi Rules
According to Politico, Sen. Rubén Gallego’s office said Democrats had “delivered paper and substance as requested,” accusing Republicans of withdrawing prematurely. A spokesperson compared the GOP demands to “setting a wedding date before the first date.”
Republicans, meanwhile, said they have sought formal comments on the drafts since June without any substantive input. A spokesperson for Speaker Tim Scott confirmed that Scott “repeatedly asked Democrats to commit to a deadline” needed to advance the legislation.
Gallego leads a coalition of about a dozen pro-cryptocurrency Democrats, including Mark Warner, Cory Booker and Angela Alsobrooks, who have tried to balance innovation with consumer protection. However, their efforts continue to face resistance from anti-crypto lawmakers such as Senator Elizabeth Warren, who maintains that digital assets pose “serious risks to financial stability and national security.”
Future of US Crypto Regulation Remains Unclear
The collapse of Senate negotiations has left the direction of US crypto policy unresolved as 2025 draws to a close. Without bipartisan consensus, Congress is unlikely to advance a comprehensive framework for digital assets this year.
Industry organizations warn that the continued stalemate gives more influence to the Treasury Department, allowing it to direct cryptocurrency oversight through administrative rulemaking and enforcement actions rather than clear-cut legislation.
By contrast, the European Union’s MiCA regulations are already in place and jurisdictions such as Singapore, Japan and the United Arab Emirates have established licensing regimes that offer legal certainty to blockchain companies.
If the Treasury gains the authority to create and enforce a “restricted list” for DeFi protocols, the United States could adopt one of the world’s toughest stances toward decentralized finance. Analysts say such a move would likely drive more developers, startups and investors to countries with clearer regulatory standards and greater political support for financial innovation.
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