A new proposal from US Senate Democrats has reignited partisan tension in Washington’s crypto debate. The plan would tighten rules on decentralized finance (DeFi) frontends and empower the Treasury Department to blacklist risky platforms.
The move drew backlash from industry leaders who warned it could halt months of bipartisan progress. Analysts say the proposal shows a deeper divide over balancing security and innovation.
Democrats’ Proposal Raises National Security Concerns
Senate Banking Committee Democrats sent the proposal to Republicans, seeking to extend Know Your Customer (KYC) requirements to crypto frontends — including non-custodial wallets — while removing legal protections for developers.
Momentum had been building since the House passed the Digital Asset Market Clarity Act 294–134 in July. Senators Ruben Gallego, Andy Kim, Raphael Warnock, Angela Alsobrooks, Lisa Blunt Rochester, and Mark Warner support the new plan.
The proposal immediately drew sharp criticism from legal and policy experts in the industry. Jake Chervinsky, chief legal officer at Variant, said it “isn’t about establishing clear rules; it’s about banning an industry.”
“It doesn’t regulate crypto—it bans crypto. This is less a framework than an unprecedented, unconstitutional government takeover of an entire industry,” he added.
Former CFTC commissioner Summer Mersinger, now at the Blockchain Association, said the draft “would effectively outlaw decentralized finance in the United States.” She warned it could drive compliant developers overseas.
Industry sources said the draft’s language could cover nearly any entity ‘designing, deploying, or profiting from’ a DeFi frontend, making compliance nearly impossible. The move comes amid fiscal negotiations and a looming government funding deadline.
Observers warn that political strain could delay crypto legislation until mid-2026.
Market Reaction and Legislative Outlook
Analysts say the dispute exposes a deeper divide in priorities. The House promotes innovation through market clarity, while Senate Democrats focus on enforcement.
Zunera Mazhar, the Digital Chamber vice president, said the new draft is “heavy-handed, ineffective, and risks pushing innovation offshore.”
She added, “Good policy doesn’t punish decentralization. It protects consumers, preserves innovation, and fights illicit finance where it actually happens.”
The market appeared to react to the regulatory uncertainty. On that day, based on CoinGecko’s DeFi coin aggregate, the DeFi market capitalization fell 3.4% from the previous day, settling at $164.1 billion.
Among the top-ranking coins, Hyperliquid (HYPE) recorded the steepest decline, dropping 5.5% to $44, followed by Astar (ASTR), which fell 10% to $1.7.
HYPE performance over the past month / Source: BeInCrypto
Analysts warn that ongoing gridlock could push liquidity and development toward Europe, where MiCA rules already define digital-asset oversight. Washington’s crypto ambitions remain stuck between control, compliance, and innovation.
