The crypto industry is reacting to a document purportedly outlining proposals from U.S. Senate Democrats for the treatment of decentralized finance (DeFi) as part of a broader effort to regulate cryptocurrencies in the United States.
The proposal (a detailed overview explaining the approach to DeFi, first reported by Politico) suggests that companies or individuals serving customer needs on the front end of DeFi operations would need to register with the Securities and Exchange Commission or the Commodity Futures Trading Commission and be regulated as brokers.
According to an opinion piece posted on social media site X by Jake Cherbinski, Valeant’s chief legal officer, the language defining who is regulated as an intermediary appears to include “anyone involved in cryptocurrencies.”
“Many aspects of this proposal are fundamentally broken and unworkable,” he argued. “This is not a ‘first offer’ in negotiations. It is a list of demands that appear to be designed to defeat the bill.”
Summer Mersinger, who runs the Blockchain Association and recently served as a CFTC commissioner, said the proposal would “effectively ban decentralized finance, wallet development, and other applications in the United States.”
“It would be impossible to comply with the language as it is written, and it would be to promote responsible development overseas,” Mersinger said in a statement. “We call on policymakers to stay at the table.”
Before the Senate’s efforts to structure the cryptocurrency market were overshadowed by ongoing negotiations to reopen the federal government, Senate Republicans and Democrats were at odds over the language of the legislation, and progress on a final consolidated bill seemed within reach. But in August, the crypto industry was bracing for an expected backlash from Democratic Sen. Mark Warner, a leading national security lawmaker who has voiced concerns about illicit finance in cryptocurrencies.
This latest proposal appears to be an attempt by the Treasury Department, market regulators, and the Federal Reserve to keep bad actors out by requiring agencies to identify who can be held accountable for DeFi activity (broadly speaking, anyone who designs, deploys, operates, or profits from a DeFi front end). However, it argues that pure DeFi protocols that are not profitable can be defined as “well-decentralized” outside of regulatory boundaries.
The proposal also calls for exempting software developers from legal liability for open source works unless they derive revenue from operating the technology. This liability issue is one of the core concerns of the DeFi space.
Meanwhile, members of the House of Representatives, whose market structure has already passed by a wide margin, are asking the Senate to use the Digital Asset Market Transparency Act as a template instead of starting from scratch.
But the Senate bill relies more on bipartisan support to clear the usual 60-vote requirement. Cryptocurrency efforts have a number of Democratic allies, but they have made it clear they want a number of changes to the previous Republican bill before jumping on board.
Read more: A16z, DeFi Group proposes safe harbor for DeFi apps to US SEC