Galaxy Compares DeFi Provisions in Crypto Bill to Patriot Act Oversight

Galaxy Research has warned that a crypto market structure bill circulating through the Senate Banking Committee would significantly expand U.S. financial oversight powers, arguing in a note that new Treasury authorities targeting decentralized financial front-ends and transaction freezes could represent the largest such expansion since 2001.

The analysis focuses on certain provisions of the the draft it would grant the U.S. Treasury Department new escalation tools, including an expansion of “special measures” authority over digital assets and a statutory framework allowing the suspension of transactions without a court order.

The plan “includes significantly strengthened financial oversight authorities to combat illicit financing compared to the House CLARITY Act,” Alex Thorn, head of enterprise-wide research at Galaxy Digital, a major crypto and digital assets company, wrote Tuesday.

If the measures were to become law, it “would represent the largest expansion of financial oversight authorities since the USA PATRIOT Act,” Thorn argued.

Thorn was referring to post-9/11. legislative package enacted in 2001, which significantly expanded federal powers of financial oversight and control, and has since reshaped how U.S. authorities track, share, and intervene in illicit financing through the banking system.

Galaxy’s warning comes as lawmakers continue to consider how much to expand Treasury’s role in overseeing crypto activities, with parallel efforts in Congress has focused on clarifying market structure and limiting developer liability under federal law. The Senate Banking Committee has pushed Its next increase in the Crypto Market Structure Bill is due later this month.

The memo describes a “temporary hold” authority that would create a formal framework for suspending digital asset transactions at the request of law enforcement, coupled with a statutory safe harbor for companies that comply in good faith.

“This is a transaction interruption lever designed to help streamline law enforcement requests as well as liability protection, allowing stablecoin issuers or service providers to quickly freeze funds without a court order,” the memo said.

Galaxy also highlighted language that “explicitly creates the concept of a ‘distributed ledger application layer’ and requires Treasury to clarify AML sanctions and obligations for frontends operating in the United States.”

Some gaps and risks

Industry observers say the debate exposes unresolved tradeoffs between compliance, privacy and the practical limits of scaling crypto for real-world commercial use.

The debate around the bill “reflects a broader shift that lawmakers are facing” where they previously faced concerns about “choosing between transparency and privacy,” said Rob Viglione, CEO of Zero Knowledge company Horizen Labs. Decrypt.

“Companies and institutions need confidentiality regarding their sensitive business activities, while regulators need auditability. What has changed is that this need is no longer theoretical,” he said.

Activity within Ethereum-based ecosystems is increasing, Viglione added, noting that this means regulators will need to evaluate how they approach compliance “without confusing auditability with expanded oversight or moving enforcement obligations onto non-custodial software layers.”

“Regulatory ambiguity that treats infrastructure as a surveillance tool” rather than “directly enabling controlled disclosure within existing legal frameworks” creates real risks for the industry, Viglione added.

While the draft released this week is “a step forward,” it “still leaves major gaps in real-world payroll and business payments,” said Megan Knab, CEO and founder of Franklin, a financial operations platform supporting on-chain payroll. Decrypt.

Stablecoins are “formally treated as money at the federal level,” but “at least eight U.S. states continue to prohibit their use for payroll payments,” she said, adding that this shows “the patchwork of state laws and banking policies that employers still have to navigate.”

“Until these contradictions are resolved,” businesses related to digital assets and other on-chain operations will still be strained, and their prospects will remain “challenging, even with clearer federal guidance,” Knab said.