A confidential bill circulating among Senate Democrats proposes sweeping new oversight of DeFi, extending know-your-customer (KYC) and anti-money laundering (AML) requirements to DeFi interfaces, validators and even node operators.
According to reports, the leaked bill was intended to serve as a Democratic counterbalance to the House-backed market structure bill. However, internal backlash reportedly blocked these broader discussions within the Senate Banking Committee.
As part of the leak, all DeFi applications enabling financial transactions must implement front-end KYC controls, potentially including browser-based wallets and liquidity interfaces.
The leaked language also imposes new responsibilities on Oracle operators, potentially exposing them to sanctions if price feeds are linked to “sanctioned” protocols.
The Treasury Department would also gain the authority to create a “restricted list” of protocols deemed too risky for U.S. users.
Senator Ruben Gallego claimed that the Democrats’ bill represents the party’s attempt to achieve bipartisan consensus on the structure of the crypto market.
According to him:
“The Democrats showed themselves ready to work… They asked for paper and content, and we kept their promises. »
Market impact
The move sparked a new wave of partisan tensions in Washington, with Republican lawmakers and crypto industry figures warning that it could cripple innovation and push U.S. Bitcoin and Ethereum liquidity overseas.
To understand the risk, one must consider the current landscape in which US-based platforms represent only a small fraction of global volume.
According to Newhedge data, US crypto trading platforms already capture less than 10% of global trading volume, while the top eight (mostly offshore) platforms account for around 90% of global market depth.
These figures show that liquidity is already gravitating towards platforms with fewer regulatory constraints. Forced compliance with the Senate’s proposal at the protocol level could accelerate this leak.
If U.S. users are forced to interact only through KYC-verified front-ends, or the Treasury can block access to specific protocols, traders seeking anonymity, flexibility, and lower friction may migrate to foreign bridges or exchanges where these constraints are looser or not enforced.
Over time, this shift would consolidate offshore platforms as liquidity hubs, reinforce the dominance of already large non-U.S. exchanges, and fragment trading across jurisdictions.
At the same time, US liquidity pools would shrink due to fewer active counterparties, wider spreads and reduced depth. This fragmentation would hinder innovation, worsen market inefficiencies, and weaken the United States’ competitive position in the global crypto market.
Additionally, the implementation of these rules could impact how US crypto users interact with the rapidly expanding DeFi sector.
A recent DeFi Funds report found that many Americans do not trust the traditional financial system.
As a result, they have become curious about the DeFi sector, which they believe offers them more advantages over the current system, including control of their money and lower transaction fees.
Industry reaction
Given the significant impact this bill would have on the market, industry players began to oppose it.
Jake Chervinsky, General Counsel of Variant Fund, said:
“Many aspects of the proposal are fundamentally broken and unworkable. This is not a ‘first offer’ in a negotiation, but a list of demands that seem designed to kill the bill.”
Chervinsky added that it was an “unprecedented (and) unconstitutional government takeover of an entire industry.” He added:
“This is not just anti-crypto, it’s anti-innovation and a dangerous precedent for the entire tech sector.”
Zack Shapiro, head of policy at the Bitcoin Policy Institute, echoed this view, emphasizing that the plan “expands illicit financing laws to target software and software developers rather than criminal behavior.”
He says this sets a dangerous precedent for censoring legal private exchanges, in the same way the government targeted the developers of Tornado Cash and Samourai Wallet.
Coinbase CEO Brian Armstrong said the bill would “set back innovation by years” and prevent America from becoming a leader in crypto finance.
He declared:
“We absolutely will not accept this. This is a bad proposition, plain and simple, that would set back innovation and prevent the United States from becoming the crypto capital of the world.”
Uniswap founder Hayden Adams added that the language would “kill DeFi” domestically.
Given this, he called for “a radical change from Democratic senators” if progress on reforming the market structure is to continue.
