Democrats propose ‘restricted list’ for DeFi protocols, sparking outcry

Despite previously supporting a crypto market structure bill, several Democratic Senators have reportedly introduced a counter-proposal that could see decentralized finance protocols placed on a "restricted list” if deemed too risky.

This move, among others, it proposed could “kill DeFi,” according to its critics.

The Senate Banking Committee Democrats sent a proposal to the committee’s Republicans on Thursday seeking to impose Know Your Customer rules on the frontends of crypto apps — including non-custodial wallets — and stripping protections from crypto developers, several industry commentators said on Thursday, citing a report from Punchbowl News.

Among those commentators was crypto lawyer Jake Chervinsky, who said the counter-proposal could kill any chance of establishing a crypto market structure framework, noting that it could undermine the bipartisan support the CLARITY Act had already secured in the House in July, where it passed 294-134.

“It’s so bad. It doesn’t regulate crypto, it bans crypto,” Chervinsky said, pointing to a suggested measure permitting the Treasury Department to create a “restricted list” for DeFi protocols it considers are too risky, making it a crime for anyone who uses them.

Chervinsky added: “This proposal is less a regulatory framework and more an unprecedented, unconstitutional government takeover of an entire industry. It’s not just anti-crypto, it’s anti-innovation, and a dangerous precedent for the entire tech sector.”

The Democrats behind the counter-proposal include Mark Warner, Ruben Gallego, Andy Kim, Reverend Raphael Warnock, Angela Alsobrooks, and Lisa Blunt Rochester, according to Chervinsky.

The move, which comes amid a government shutdown, could be seen as reversing regulatory momentum built under the Trump administration, which has pledged to make the United States the “crypto capital of the world.”

Counter-proposal undermines bipartisan RFIA draft

It also clashes with aspects of the Senate Banking Committee’s Responsible Financial Innovation Act draft on Sept. 9, a bipartisan effort that seeks to assign the Commodity Futures Trading Commission oversight of spot markets and reduce the Securities and Exchange Commission’s overreach.

RFIA also seeks to offer more robust protections to crypto developers to ensure they can build without fear of being prosecuted, amid the Tornado Cash and Samourai Wallet devs in recent months.

Good policy doesn’t punish decentralization: Digital Chamber

Digital Chamber’s vice president of government and policy affairs, Zunera Mazhar, described the measures as heavy-handed and ineffective, adding that they risk pushing innovation offshore instead of addressing the real risks involved.

Related: Democrats press bank regulator on Trump stablecoin conflicts

Instead, Mazhar said the Democrats should target the “real chokepoints” where illicit finance occurs with a risk-based approach that doesn’t crush innovation and create regulatory uncertainty.

“Good policy doesn’t punish decentralization. It protects consumers, preserves innovation, and fights illicit finance where it actually happens.”

This is a developing story, and further information will be added as it becomes available.

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