The crypto industry is backing away from a document that reportedly outlines a Democratic position from the US Senate on dealing with decentralized finance (DeFi) as part of broader efforts to regulate crypto in the US.
The proposal — a detailed outline describing an approach to DeFi, first reported by Politico — suggests that a company or individuals that handle customer needs on the front end of a DeFi operation would have to register with the Securities and Exchange Commission or the Commodity Futures Trading Commission and be regulated as a broker.
The language defining who is subject to regulation as an intermediary appears to include “anyone in crypto,” according to a recording on social media site X from Jake Chervinsky, Variant’s chief legal officer.
“Many aspects of the proposal are fundamentally broken and unworkable,” he argued. “This is not a ‘first offer’ in a negotiation; it is a list of demands that appear designed to kill the bill.”
Summer Mersinger, who heads the Blockchain Association and recently served as a commissioner at the CFTC, said the proposal would “effectively ban decentralized finance, wallet development and other applications in the United States.”
“The language as written is impossible to comply with and would encourage responsible development abroad,” Mersinger said in a statement. “We urge our policymakers to remain at the table.”
Before work on the Senate’s crypto market structure fell into the shadow of ongoing negotiations to reopen the federal government, Republicans and Democrats in the Senate circled each other on legislative language and appeared to be within reach of making progress on a final, combined bill. But the industry braced in August for an expected backlash from Democratic Sen. Mark Warner, a key lawmaker on national security issues who has raised concerns about illegal financing in crypto.
This latest proposal apparently seeks to allow the Treasury Department, market regulators, and the Federal Reserve to pressure bad actors by having government agencies identify those they can hold responsible for DeFi activities, loosely defined as “anyone who designs, implements, operates, or profits from a DeFi front-end.” However, it means that pure non-monetized DeFi protocols can be defined as “sufficiently decentralized” to fall outside the regulatory perimeter.
The proposal also aims to free software developers from legal liability for their open-source creations, as long as they don’t make money from exploiting the technology. This liability question has been one of the key concerns of the DeFi space.
Meanwhile, lawmakers in the House of Representatives, where a market structure has already passed by a wide margin, have called on the Senate to move ahead as usual and use their Digital Asset Market Clarity Act as a template rather than starting over.
However, the Senate legislation is more dependent on bipartisan support to meet the usual 60-vote requirement. While the crypto work has a long list of Democratic allies, they have made it clear that there are a number of changes they are seeking from previous Republican bills before they can jump on board.
Read more: A16z, DeFi Group pitches US SEC on Safe Harbor for DeFi apps
