Senate Democrats' DeFi legislative proposal draws fire from committee Republicans, crypto advocates

A new proposal from Senate Democrats aimed at preventing illicit activity through decentralized finance is getting heat from many in the cryptocurrency industry and Republicans across the aisle. 

On Thursday, 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. 

Some in the crypto industry were quick to criticize the proposal, calling it disappointing. Blockchain Association CEO Summer Mersinger warned that it would "effectively ban decentralized finance, wallet development and other applications." 

"The language as written is impossible to comply with and would drive responsible development overseas," Mersinger said in a statement. 

The six-page proposal, obtained by Politico, would designate the Treasury Department and other financial regulators to define when an entity or person "exercises control or sufficient influence." The Treasury Department would also decide whether a "protocol is sufficiently decentralized," according to that text. 

Senate Banking Committee Democrats also proposed that any person or entity who "designs, deploys, controls, operates a front-end service for a DeFi protocol" or "materially benefits from a decentralized finance protocol that facilitates covered financial activities" would be considered an intermediary. 

Different drafts

The Senate is working on its own legislation to regulate crypto market structure after the House passed its version this summer. The Senate Banking Committee's draft looks to allocate jurisdiction between the Securities and Exchange Commission and the Commodity Futures Trading Commission as well as create a new term for "ancillary assets" to clarify which cryptocurrencies are not securities. 

A committee spokesperson said Republicans were "eager to work with Democrats on market structure," but noted Democrats had not committed to dates to debate the bill during a markup hearing. “What was sent to Republicans was not a legislative offer; the document was not written in legislative text, included multiple incoherent policy ideas, and was not a good-faith effort to engage on market structure," the spokesperson said in an email to The Block.

A spokesperson for Democrats on the Banking Committee did not immediately respond to a request for comment. Democrats on the committee previously set forth a framework that looked to "close regulatory gaps" and fold crypto issuers into a "regulatory framework."

Republicans need to get some Democrats' support in the Senate to pass a market structure bill. A final Senate bill would also need to be reconciled with the House's version. Meanwhile, the Senate Agriculture Committee, which has jurisdiction over the CFTC, has not yet released its version of the bill.

Jake Chervinsky, chief legal officer at the Variant Fund, called the Democrats' proposal "unserious," in a post on Thursday on X. 

"These Senators claim to be pro-crypto, but what they propose is basically a crypto ban," Chervinsky said. "It's hard to imagine a good deal happening right now."