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Senate Democrats have reignited Washington’s crypto policy fight with a sweeping proposal to establish a restricted list for DeFi protocols, granting the U.S. Treasury Department authority to flag decentralized finance applications deemed risky.
The measure, introduced in a counter-offer sent to Republicans on Thursday, would enforce Know Your Customer (KYC) requirements on decentralized app frontends, including non-custodial wallets and remove legal protections for developers. It could also penalize U.S. nationals who engage with or earn revenue from blacklisted DeFi platforms.
The idea of a restricted list for DeFi protocols immediately derailed months of bipartisan negotiations on a long-awaited crypto market structure bill. GOP staffers from the Senate Banking Committee announced that all talks would be suspended until “an agreed upon date for markup” is set, according to committee Republican Staff Director Catherine Fuchs.
Republicans criticized the move as an incoherent policy proposal lacking legislative clarity. Crypto lawyer Jake Chervinsky warned that the plan “might eliminate any opportunity to establish a structured crypto market framework,” calling it “an unprecedented, unconstitutional government takeover of an entire industry.”
The restricted list for DeFi protocols proposal, backed by Democrats including Mark Warner, Ruben Gallego, Raphael Warnock, Angela Alsobrooks, and Lisa Blunt Rochester, threatens the GOP-led effort to pass comprehensive crypto legislation before the end of the year.
The digital asset industry reacted sharply to the Democrats’ counter-proposal, warning that the restricted list for DeFi protocols would cripple innovation and drive crypto developers abroad.
Summer Mersinger, CEO of the Blockchain Association, said the policy would “make compliance impossible, pushing responsible development and the next wave of financial technology offshore.”
She added that while DeFi could survive, “it would thrive overseas rather than in the United States,” urging lawmakers to “stay at the table and continue engaging across the aisle” to craft balanced legislation.
Zunera Mazhar, Vice President at the Digital Chamber, echoed those concerns, arguing that the restricted list for DeFi protocols approach attempts to “fight illicit finance with outdated tools.” She said it gives Treasury “sweeping authority while narrowly defining decentralization” and wrongly treats app frontends as financial intermediaries.
Mazhar urged lawmakers to focus on “real chokepoints where illicit finance occurs,” through risk-based oversight aligned with global standards instead of punishing open-source code developers.
Adding to the criticism, Brian Armstrong, CEO of Coinbase, called the proposal “a bad idea, plain and simple,” warning that it would “set innovation back and prevent the U.S. from becoming the crypto capital of the world.”
The restricted list for DeFi protocols proposal has fractured already fragile bipartisan cooperation. It directly conflicts with the Responsible Financial Innovation Act (RFIA) draft introduced on September 7, a bipartisan bill that assigned oversight of spot crypto markets to the Commodity Futures Trading Commission (CFTC) while limiting the Securities and Exchange Commission’s reach.
That earlier draft also protected DeFi developers from prosecution, a safeguard inspired by the controversial legal cases against Tornado Cash and Samourai Wallet creators. The new Democratic proposal eliminates those protections, reigniting fears of criminal liability among developers building open-source financial tools.
Democrats involved in negotiations defended their approach. Jacques Petit, spokesperson for Senator Ruben Gallego, said the party “showed up ready to work” and delivered “paper and substance as requested.” He accused Republicans of leaking the proposal and feigning surprise at policy differences, comparing their markup demand to “setting a wedding date before the first date.”
Republicans countered that Democrats have avoided legislative feedback since June. Jeff Naft, spokesperson for Senate Banking Chair Tim Scott, said Scott repeatedly pushed for a September 30 markup date to advance talks, but Democrats refused to commit.
Senator Ruben Gallego now leads a coalition of a dozen crypto-friendly Democrats — including Kirsten Gillibrand, Mark Warner, and Cory Booker who support continued negotiations. However, they face internal opposition from senior figures like Elizabeth Warren, a staunch crypto critic who views DeFi as a threat to financial stability and national security.
Gallego told reporters late Thursday that Democrats remain committed to achieving a bipartisan crypto bill but “will not be pressured into artificial deadlines.”
As the standoff deepens, the future of U.S. crypto policy hangs in the balance. Whether the restricted list for DeFi protocols becomes law or dies in committee could define the trajectory of decentralized finance and determine whether innovation stays in America or moves offshore.
