- Senate Democrats have sent out a counterproposal on some aspects of the ongoing Digital Asset Market Structure legislation.
- Among other demands, they want the bill to designate everyone interacting with a defi protocol as an intermediary.
- Democrats also want front-end providers, even non-custodial wallets, to implement KYC registration for users.
The latest demands by US Senate Democrats on the direction of the ongoing market structure legislation are widely viewed as counterintuitive and a pushback from the forward-leaning approach of the current administration towards the crypto industry. In a recent proposal, Democrats are pushing KYC registration from non-custodial wallet users, among several other demands that could stifle digital asset innovation in the country.
Democrats Want To Remove Core Defi Protections
As part of the efforts to create a comprehensive market structure bill, Senate Republicans have been working on the Responsible Financial Innovation Act of 2025, which focuses more on the securities components of Market Structure. To complement these efforts, 12 Democrats sent a draft in September, outlining seven key expectations from the legislation.
At first glance, most of the requirements in the draft appear to be in line with the broader pro-crypto regulatory approach of the current administration; however, the latest proposal from Senate Democrats seems impractical from an innovative perspective.
The proposal essentially pushes for a regulatory framework for defi (decentralized finance) platforms. Instead of reinforcing the protection of software developers from unfair regulation and enforcement actions, it does just the opposite.
Democrats are looking to label as intermediaries everyone who deploys a defi protocol or benefits from it, regardless of whether the platform is fully decentralized. This essentially makes everyone in the cryptocurrency space an intermediary, while contradicting the basic principle of decentralization.
It reinvents the Gensler-era regulatory crackdown on open source developers who build decentralized protocols. Consequently, most US builders would be forced to go overseas to friendlier regulatory climates or completely stop building, to the detriment of the defi economy.
Furthermore, Democrats seek to remove the privacy and anonymity offered by defi protocols. Their proposal will force all front ends or Defi interfaces (websites) that help users interact with blockchain protocols, including non-custodial wallets, to KYC their users, irrespective of whether these front ends control funds or not.
Mandating KYC for defi front ends and requiring them to conduct warrantless surveillance on users will not only place extra regulatory burdens on these interfaces but also discourage users who bank on their speed, accessibility, privacy, and security.
Proposal Will Resurrect Unchecked, Arbitrary Regulation
The Democrats’ proposal also emboldens agencies to unleash arbitrary regulation on anyone having “sufficient influence” in a decentralized finance (DeFi) protocol, a phrase that potentially implicates anyone in the DeFi space. Also, it authorizes the Treasury to have a “restricted list’ of front ends and defi protocols it thinks are risky for users.
Summer Messinger, CEO of the Blockchain Association, has called out the proposal as “disappointing.” According to her, “the language, as drafted, would make compliance impossible, pushing responsible development and the next wave of financial technology offshore.”
She stressed the need for clear, comprehensive, and pro-innovation rules that will protect customers and called on Congress to establish core defi protections as the center of market structure legislation.
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