Senate Democrats’ New DeFi Regulation Proposal Stalls Crypto Market Structure Talks

Senate Democrats have proposed new regulations for decentralized finance (DeFi) that they want to include in the crypto market structure bill (CLARITY Act). This has stalled bipartisan talks between Democrats and Republicans, as these provisions do not align with the Republicans’ earlier draft for the bill.

Democrats Propose New DeFi Regulations In Crypto Market Structure

Senate Democrats are proposing that anyone who deploys a DeFi protocol is an intermediary, despite such protocols being decentralized. This could eliminate the protections that Republicans had sought for software developers. Furthermore, it would mean that developers could face the 1960 charge for operating an unlicensed transmitting business.

As CoinGape reported, Senate Republicans updated the draft crypto market structure to include protections for DeFi developers. One of the protections included a section that clearly stated that a person needs control over assets for the law to consider them a money transmitting business operator.

Another of the Senate Democrats’ proposed DeFi regulations also forces front-end providers to KYC users. The proposal disregards whether developers have control, as it mandates that all front-end systems collect customer data and conduct surveillance to prevent illicit finance.

Furthermore, the new DeFi proposal for the crypto market structure bill also allows the U.S. Treasury to regulate anyone with sufficient influence in a DeFi protocol. It grants the regulator discretion to determine what constitutes “sufficient influence.”

The U.S. Treasury will also have the authority to ban anything in DeFi, as a provision creates a “restricted list” of protocols and front-ends that the regulator considers too risky. It will also be a crime for anyone to interact with such DeFi protocols. “There is no limiting principle, defense, or recourse. Treasury is all-powerful,” Variant Fund’s Chief Legal Officer (CLO) Jake Chervinsky said.

Bipartisan Talks Between Democrats And Republicans Stall

The Senate Democrats’ DeFi proposal for the crypto market structure bill has sparked a clash with Senate Republicans, leaving bipartisan talks at a deadlock. This could further delay the markup phase for the crypto bill.

As CoinGape reported earlier, the CLARITY Act markup was already delayed, in part, due to the U.S. government shutdown. Thanks to this delay, there is also the possibility that the crypto regulation may not pass this year as originally intended.

Meanwhile, as Punchbowl News reported, Catherine Fuchs, Republican staff director of the Senate Banking Committee for Chair Tim Scott, said that they would pause any further meetings until Democrats agreed to schedule a markup session.

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Chervinsky remarked that the Senate Democrats are trying to kill the crypto market structure bill. He noted that while these senators claim to be pro-crypto, what they are proposing is basically a crypto ban. The legal expert added that it is hard to imagine a good deal happening between both sides right now.

The Variant Fund CLO also stated that the DeFi proposal is less a regulatory framework and more an “unprecedented, unconstitutional government takeover of an entire industry.” “It is not just anti-crypto, it’s anti-innovation, and a dangerous precedent for the entire tech sector,” he added.

Summer Mersinger, the CEO of the Blockchain Association, said that the “disappointing proposal” outlined by the Senate Democrats would effectively ban DeFi, wallet development, and other applications in the U.S. She added that the language is impossible to comply with and would drive “responsible development” overseas.