A sensitive bill circulating among Senate Democrats proposes sweeping new oversight of DeFi, extending know-your-customer (KYC) and anti-money laundering (AML) obligations to DeFi interfaces, validators, and even node operators.
The leaked bill was reportedly intended as a Democratic response to the House-backed market structure bill. However, internal opposition has reportedly stalled broader discussions within the Senate Banking Committee.
Under the leaked framework, all DeFi applications that enable financial transactions will be required to implement front-end KYC controls, which may include browser-based wallets and liquidity interfaces.
The leaked language also imposes new responsibilities on oracle operators, potentially making them subject to enforcement if their price feeds are linked to “authorized” protocols.
The Treasury Department would also have the authority to create a “restricted list” of protocols deemed too risky for U.S. users.
Sen. Ruben Gallego argued that the Democratic bill represents his party’s attempt to build bipartisan consensus on the structure of the cryptocurrency market.
According to him:
“Democrats seem ready to operate… They asked for documents and materials, and we got it.”
Market impact
The move has sparked new partisan tensions in Washington, with Republican lawmakers and crypto industry officials warning it could stifle innovation and push U.S. Bitcoin and Ethereum liquidity overseas.
To understand the risks, we need to consider the current situation, where U.S.-based platforms represent only a small portion of the global total.
According to Newhedge data, US crypto exchanges already account for less than 10% of global trading volume, while the top eight (mostly offshore) platforms account for around 90% of global market depth.
These numbers show that liquidity is already flocking to platforms with fewer regulatory constraints. The Senate’s proposal to enforce compliance at the protocol level could accelerate that escape.
If U.S. users are forced to interact only through KYC-verified front ends, or if the Treasury Department can block access to certain protocols, traders seeking anonymity, flexibility, and reduced friction may migrate to bridges and foreign exchanges where those restrictions are less stringent or unenforced.
Over time, that change will solidify offshore platforms as liquidity hubs, deepening the dominance of already large non-U.S. exchanges and fragmenting cross-jurisdictional trading.
At the same time, the U.S. liquidity pool will shrink due to fewer active counterparties, wider spreads, and less depth. That fragmentation will stifle innovation, exacerbate market inefficiencies, and weaken America’s competitiveness on the global crypto rail.
Additionally, the introduction of these rules could impact interactions between US cryptocurrency users and the rapidly expanding DeFi sector.
A recent DeFi fund report revealed that many Americans don’t trust the traditional financial system.
As a result, they have become interested in the DeFi industry and believe it offers many benefits over the current system, such as fund management and reduced transaction fees.
Industry backlash
Given the significant impact this bill will have on the market, industry players have begun to voice their opposition to the bill.
Jake Cherbinski, Chief Legal Officer of Valiant Funds, said:
“Many aspects of this proposal are fundamentally broken and unfeasible. This is not a ‘first offer’ in negotiations, but a list of demands that appear designed to kill the bill.”
Cherbinsky added that this is an “unprecedented situation.” [and] This is an unconstitutional government takeover of the entire industry. ” he added.
“This is not just anti-cryptocurrency, it’s anti-innovation and sets a dangerous precedent for the entire tech sector.”
Zach Shapiro, director of policy at the Bitcoin Policy Institute, echoed this view, noting that the draft law “expands illegal finance laws to target software and software developers rather than criminal activity.”
He said this sets a dangerous precedent for governments to censor legitimate private exchanges, similar to how they targeted the developers of Tornado Cash and Samurai Wallet.
Coinbase CEO Brian Armstrong said the bill would “set back innovation by years” and prevent the U.S. from taking the lead in crypto finance.
He said:
“We will never accept this. This is a bad proposal, plain and simple, and will set back innovation and prevent the United States from becoming the crypto capital of the world.”
Uniswap founder Hayden Adams added that the language “will kill DeFi” in the country.
With this in mind, he called for a “significant shift away from the Democratic Senate” if progress on market structural reform is to continue.