Executive Summary
- What’s new: Senate Democrats have introduced a DeFi proposal that creates a new regulatory framework for decentralized finance platforms, focusing on preventing illicit financing and regulatory arbitrage by applying existing securities market requirements to DeFi.
- Why it’s important: The DeFi proposal would significantly expand regulatory oversight of DeFi platforms and front-end applications, impacting developers, operators, and intermediaries in the digital asset and cryptocurrency industries.
- What to do next: Companies and organizations involved in DeFi should closely monitor legislative developments, assess their exposure to new regulatory definitions, and prepare for potential registration, compliance, and risk management obligations.
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Key Points
- A new Democratic counterproposal on DeFi regulation highlights several policy differences on how to regulate the structure of the digital asset market in the United States. Due to political disagreements, lawmakers remain at odds over the timeline for drafting a comprehensive market structure bill and its eventual passage.
- This proposal is the third regulatory framework on the structure of the crypto-asset market to come from Congress. In September, the Senate Banking Committee released its proposal, and the CLARITY Act passed the House in July.
- All three proposals seek to leverage existing regulatory frameworks to create a crypto market structure and show Congress’s instinct to modernize the current system rather than design one designed for crypto.
- The Democratic proposal, however, would require DeFi front-end applications to register with the SEC or CFTC and subject them to rigorous KYC rules and Treasury oversight, marking a clear expansion of federal control over decentralized platforms.
- Lacking alignment on key issues, the Senate Banking Committee has suspended meetings on digital market structure, while the Senate Agriculture Committee is expected to release its own bill in October. It is unclear whether procedural and political disagreements will prevent the Senate from passing legislation on crypto market structure in 2026.
Senate Democrats recently presented a counteroffer to Republicans’ legislative agendas on decentralized finance (DeFi) and cryptocurrency. The Democrats’ DeFi Proposal focuses on preventing illicit financing and regulatory arbitrage through decentralized finance platforms. It attempts to achieve this goal by creating a regulatory framework that integrates many existing regulatory requirements for securities market participants and applying them to DeFi.
The DeFi proposal, which has not been drafted into legislation, covers a wide range of DeFi applications and platforms under a new regulatory regime overseen by the Department of the Treasury (Treasury), the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC). The DeFi proposal follows House passage of the CLARITY Act in July 2025 and the Republican-led Senate Banking Committee’s Responsible Financial Innovation Act (RFIA) bill, released on September 9, 2025.
Although the DeFi proposal follows the RFIA in some respects, several provisions seek to promote an alternative approach to regulating crypto market structure.
Role of the Treasury
The DeFi proposal is uniquely positioned and gives Treasury a key role in the market structure process and gives it the power to determine whether a protocol is sufficiently decentralized. Additionally, the DeFi proposal treats any DeFi project whose controllers generate revenue from users, exert significant influence over the project, and maintain concentrated voting power as a “money services business,” although Treasury could expand this definition.
Like the RFIA and the CLARITY Act, the DeFi proposal gives Treasury a central role in preventing illicit financial activity on digital assets, but its approach differs. The RFIA and the CLARITY Act each direct the Treasury to draft rules applicable to BSAs and anti-money laundering obligations to certain digital asset service providers and intermediaries. In contrast, the DeFi proposal authorizes the Treasury to create a restricted list of DeFi projects and applications that have been used for money laundering or other illegal purposes. This further allows Treasury to determine whether an individual or group of individuals has sufficient control over a DeFi platform to qualify as a “digital asset intermediary” for purposes of the DeFi Proposal and the BSA. These entities would also be classified as virtual asset service providers under U.S. law and would be subject to applicable regulatory requirements.
Structure of the digital asset market
All three proposals build on existing regulatory frameworks for individuals who perform essential functions in the digital asset markets ecosystem and subject them to varying degrees of regulatory oversight. The CLARITY Act contains significant exemptions for DeFi projects from most SEC or CFTC regulations (but not anti-fraud, anti-manipulation or misrepresentation rules) if they simply verify blockchain transactions, provide computing power, build blockchain interfaces or develop software and trading wallets. The RFIA adopts the definition of digital asset service providers from the GENIUS Act, which contains less sweeping exemptions. The RFIA also calls for the creation of a public-private partnership to allow participants to test new tokens and other DeFi or crypto projects within a closely monitored joint SEC-CFTC sandbox.
The DeFi proposal, however, creates a new level of potential regulatory oversight by explicitly extending obligations to front-end applications in an effort to close perceived regulatory gaps. The DeFi Proposal considers any person or entity that designs, deploys, controls, or operates a front-end service for a DeFi protocol, or materially benefits from a DeFi protocol that facilitates covered activities such as trading, custody, settlement, and lending, to be a digital asset intermediary. Accordingly, they would be required to register as broker-dealers with the SEC, or as commission traders of futures contracts or digital commodities broker-dealers with the CFTC, unless another category of registrant is more appropriate for their activities. The DeFi proposal requires digital asset intermediaries to implement a comprehensive risk management program, conduct regular stress testing, and ensure that any underlying code is independently audited. It also requires them to monitor fraud, manipulation, sanctions evasion, money laundering and other illicit financial activities.
Investment contracts and ancillary assets
Compared to the CLARITY Act and the RFIA, the DeFi proposal offers little opportunity to develop clearer rules of conduct for digital assets that may be considered investment contracts that currently fall under the jurisdiction of the SEC. The CLARITY Act and RFIA would create a unified regulatory framework for digital assets and currencies, but where the CLARITY Act sought to classify digital assets into three distinct categories and make the CFTC the primary U.S. crypto regulator, the RFIA makes the SEC the primary regulator over what it calls “ancillary assets” – digital assets distributed under the framework. of an investment contract – when they are traded on primary markets, for example for the purpose of raising capital. Ancillary assets traded in the secondary market would not be considered securities under the RFIA, and the RFIA requires the SEC to issue joint regulations with the CFTC regarding margining, swaps, futures, options, and digital products. The Senate Agriculture Committee is expected to soon release its own bill that would define the CFTC’s authority.
Importantly, the RFIA also requires the SEC to define “investment contract,” which could modify or codify the test for such contracts arising from the Supreme Court ruling. SEC v. Howey decision. Since Senate Democrats hope the DeFi proposal will be just one part of a more comprehensive market structure bill, the DeFi proposal does not contain a requirement that the SEC define investment contracts. Notably, Sen. Elizabeth Warren (D-Mass.), ranking member of the Senate Banking Committee, has publicly opposed changes to the banking system. Howey test and the creation of a category of ancillary assets.
Legislative path forward
Due to political disagreements, lawmakers remain at odds over the timeline for drafting a comprehensive market structure bill and its eventual passage. Republican senators asked Democratic senators to set a date to mark the bill, but Democrats refused to do so until both sides could agree on its contents. This impasse led the Senate Banking Committee to suspend its meetings on the bill, while the Senate Agriculture Committee is expected to release its own bill outlining the CFTC’s authority. It is unclear whether these procedural and political disagreements will delay or ultimately derail congressional efforts to pass crypto market structure legislation in 2026. Bipartisan compromise will likely be necessary for any crypto market structure bill to pass the Senate’s 60-vote threshold.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable national laws.
