Democrats Propose ‘Restricted List’ for DeFi Protocols in Bill That Could ‘Kill’ Sector

Senate Democrats sent Republicans a counter-proposal on Thursday that would permit the Treasury Department to create a “ restricted list ” for DeFi protocols deemed too risky, triggering an immediate halt to bipartisan crypto market structure ￰3￱ proposal would impose Know Your Customer rules on crypto app frontends, including non-custodial wallets, strip protections from crypto developers, and potentially punish US nationals who use restricted protocols and generate recurring revenues from ￰4￱ Suspends Talks as Bipartisan Show Their Cards GOP staff suspended all crypto talks after receiving the Democratic offer, with Senate Banking Committee Republican Staff Director Catherine Fuchs writing in an email that meetings would pause “ until we have an agreed upon date for markup. ” Republicans criticized the proposal as not written in legislative text, containing incoherent policy ideas, and representing a bad-faith negotiation effort rather than a serious regulatory ￰5￱ lawyer Jake Chervinsky stated that the counter-proposal might eliminate any opportunity to establish a structured crypto market ￰6￱ warned that it could weaken the bipartisan backing the CLARITY Act gained in the House in July, where it passed with a vote of ￰7￱ described the proposal as an “ unprecedented, unconstitutional government takeover of an entire industry ” that doesn’t regulate crypto but effectively bans it. 1/ Senate Democrats are trying to kill market structure.

A group just sent a counter-proposal to the RFIA and it is deeply ￰8￱ Senators claim to be pro-crypto, but what they propose is basically a crypto ban. It's hard to imagine a good deal happening right now ￰0￱ — Jake Chervinsky (@jchervinsky) October 9, 2025 The Democrats behind the counter-proposal include Mark Warner, Ruben Gallego, Andy Kim, Reverend Raphael Warnock, Angela Alsobrooks, and Lisa Blunt ￰9￱ clash threatens the GOP-led effort to pass landmark crypto legislation this ￰10￱ Banking Chair Tim Scott and other Republicans have rushed to pass a market structure bill before year-end, but struggled to attract the necessary bipartisan ￰11￱ dispute comes as the AFL-CIO urged the Senate Banking Committee on October 7 to oppose the Responsible Financial Innovation Act, warning the legislation would expose workers’ retirement funds to crypto volatility while increasing systemic financial ￰12￱ Leaders Warn Proposal Would Push Innovation Offshore Blockchain Association CEO Summer Mersinger warned the Democratic proposal would “ make compliance impossible, pushing responsible development and the next wave of financial technology offshore .” She said DeFi might survive but would thrive overseas rather than in the United States, urging “ policymakers to stay at the table and continue engaging across the aisle ” to ensure legislation supports rather than hinders American leadership in financial technology. 1/ A new disappointing proposal from Senate Democrats would effectively ban decentralized finance, wallet development, and other decentralized applications in the United States.

That’s a nonstarter – and it’s not consistent with America’s long tradition of leading on innovation.… — Summer Mersinger (@SKMersinger) October 9, 2025 Similar to Mersinger, Digital Chamber Vice President Zunera Mazhar also criticized the draft for trying to “ fight illicit finance with outdated tools ”, giving Treasury sweeping authority while narrowly defining decentralization and treating frontends like financial ￰13￱ also called for targeting “ real chokepoints where illicit finance occurs ” through risk-based oversight instead of regulating code or governance, aligning with global standards rather than creating ￰14￱ many other industry leaders who have voiced their concerns on the proposal, the CEO of Coinbase, Brian Armstrong, joined them, saying, “ It’s a bad proposal, plain and simple, that would set innovation back, and prevent the US from becoming the crypto capital of the world. ” We absolutely won’t accept this It’s a bad proposal, plain and simple, that would set innovation back, and prevent the US from becoming the crypto capital of the ￰15￱ legislating is a process, and we’re committed to engaging and helping Congress get it ￰16￱ will keep… ￰1￱ — Brian Armstrong (@brian_armstrong) October 10, 2025 The counter-proposal clashes with the Senate Banking Committee’s Responsible Financial Innovation Act draft from September 7 , a bipartisan effort assigning the Commodity Futures Trading Commission oversight of spot markets while reducing Securities and Exchange Commission ￰17￱ RFIA draft introduced protections for DeFi developers, ensuring they can build without fear of prosecution following recent cases involving Tornado Cash and Samourai Wallet ￰18￱ Negotiations Collapse Over Process and Substance According to Politico , Senate Democrats involved in negotiations defended their approach, with Senator Ruben Gallego spokesperson Jacques Petit saying Democrats showed up ready to work but Republicans “ are crashing out .” Petit stated Democrats delivered paper and substance as requested, only for Republicans to leak the proposal and pretend surprise at policy ￰19￱ called Republican demands to set a markup date before text agreement “ like setting a wedding date before the first date .” Republicans counter that they repeatedly asked for legislative feedback since June 27 without receiving formal, substantive input on discussion ￰20￱ Banking Chair Tim Scott’s spokesperson, Jeff Naft, said Chairman Scott pushed the September 30 markup date, hoping for bipartisan engagement, and asked multiple times for Democrats to commit to a markup date necessary to move legislation ￰21￱ leads a group of twelve crypto-friendly Senate Democrats negotiating the bill, including Kirsten Gillibrand, Mark Warner, Angela Alsobrooks, and Cory ￰22￱ face opposition from other party members like Senate Banking ranking member Elizabeth Warren, who has always been an anti-crypto advocate who believes that crypto poses risks to financial stability and national security.

Trump’s SEC Chair spent his career advising big banks and giant corporations. It’s no surprise the SEC is now dropping cases against his Wall Street ￰23￱ the latest example of how Trump and his Administration are engaging in open corruption on an unprecedented scale. ￰2￱ — Elizabeth Warren (@SenWarren) September 25, 2025 Gallego told reporters late Thursday that Democrats would continue working but refuse to be pushed into setting artificial deadlines for a vote while remaining committed to achieving a bipartisan market structure bill.