Senate Democrats have proposed regulations classifying most DeFi protocols as intermediaries subject to anti-money laundering rules, drawing sharp criticism from the crypto sector. The leaked plan, aimed at combating illicit finance, is seen by industry leaders as a potential ban on decentralized finance. This controversy threatens ongoing negotiations for broader crypto market structure legislation.
Senate Democrats introduced a proposal this week to regulate decentralized finance (DeFi), classifying virtually every DeFi protocol as a 'digital asset intermediary' required to verify customer identities and comply with anti-money laundering regulations. Websites offering access to these protocols would need to register as brokers and adhere to new standards, including code audits, stress testing, disclosures on risks and governance, and customer protections.
The proposal, obtained by Politico, states: 'This approach establishes a clear regulatory framework for decentralized finance platforms by defining accountability, clarifying oversight, and preventing the misuse of decentralized protocols for illicit finance, sanctions evasion, or to bypass market guardrails.' It grants the Treasury Department authority to determine if a protocol is 'sufficiently decentralised,' exempting it from intermediary status unless it features US-facing websites or generates recurring revenues from third-party use. The Treasury could also add protocols or related websites to a 'restricted list' for facilitating illicit activities, posing risks to markets, financial stability, or national security. Notably, writing or publishing code would not be criminalized without deployment, control, or profit.
The leak surprised the industry, with an anonymous source saying: 'We had no idea that this was going to be the response. They did not intend for this to be public.' Crypto leaders decried it as a nonstarter. Blockchain Association CEO Summer Mersinger stated: 'The disappointing proposal outlined by Senate Democrats would effectively ban decentralised finance, wallet development, and other applications in the United States.' Uniswap founder Hayden Adams posted on X: 'Sadly, senate dems want to kill DeFi entirely — even the ones that call themselves pro crypto. No other conclusion if this is their policy stance.'
The plan, largely led by Senator Mark Warner, contrasts with a September framework from 12 Democrats open to market structure talks. It follows the House's July passage of the Clarity Act, establishing the Commodity Futures Trading Commission as the primary crypto regulator with bipartisan support. Senator Elizabeth Warren had warned: 'It’s critical that any crypto regulation bill we pass does not have massive unintended consequences... that would reach far beyond the crypto market and take a tire iron to the $120 trillion golden egg that is America’s capital markets.'
Negotiations, initially targeting a September deadline set by Senate Banking Committee Chair Tim Scott, face delays amid a government shutdown and partisan rifts. Republicans demand a markup hearing before further talks, per Politico. The source noted varying support among Democrats but emphasized: 'Everybody still wants to try to get to a productive place... It’s just very disappointing.' Industry pessimism grows, with passage unlikely before spring 2025.