Despite previously supporting the Cryptocurrency Market Structure Act, several Democratic senators have reportedly introduced a counterproposal that could place decentralized finance protocols on a “restricted list” if they are deemed too risky.
Multiple industry commentators cited a report in Punchbowl News on Thursday that Democrats on the Senate Banking Committee sent a proposal to Republicans on the committee Thursday that calls for imposing know-your-customer rules on the front ends of crypto apps, including non-custodial wallets, and stripping protections from crypto developers.
Among these commentators was cryptocurrency lawyer Jake Cherbinski, who said the counterproposal could kill any chance of establishing a framework for a cryptocurrency market structure and undermine the bipartisan support already secured by the CLARITY Act, which passed the House of Representatives in July by a vote of 294-134.
“This is a very bad thing. Instead of regulating cryptocurrencies, it bans cryptocurrencies,” Chervinsky said, pointing to a proposed measure that would authorize the Treasury Department to create a “restricted list” of DeFi protocols it deems too risky and criminalize anyone who uses them.
Chervinsky added: “This proposal is less a regulatory framework and more an unprecedented and unconstitutional government takeover of an entire industry. It is not only anti-cryptocurrency, it is anti-innovation and sets a dangerous precedent for the entire technology industry.”
Cherbinski said Democrats supporting the counterproposal include Mark Warner, Ruben Gallego, Andy Kim, the Rev. Raphael Warnock, Angela Allbrooks and Lisa Blunt Rochester.
The move, made amid a government shutdown, could be seen as a reversal of the regulatory momentum built under the Trump administration, which promised to make the U.S. the “crypto capital of the world.”
The bill also clashes with aspects of the Senate Banking Committee’s draft Responsible Financial Innovation Act on September 9, a bipartisan effort that aims to assign spot market oversight to the Commodity Futures Trading Commission and reduce overreach at the Securities and Exchange Commission.
The RFIA also aims to provide stronger protections for crypto developers so they can build without fear of prosecution, as has been the case in recent months with developers of Tornado Cash and Samourai Wallet.
Zunera Mazar, vice president of government and policy at the Digital Chamber, said the measures were heavy-handed and ineffective, adding that they risked pushing innovation overseas instead of addressing the real risks involved.
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Instead, Mazar said, Democrats should target the “real hot spots” where illicit financing occurs with a risk-based approach that doesn’t crush innovation or create regulatory uncertainty.
“Good policy doesn’t punish decentralization; it protects consumers, sustains innovation, and fights illicit finance where it actually takes place.”
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