U.S. Democrats' DeFi regulation draft draws industry 'pushback'... "Virtually a ban"

The U.S. Democratic Party has presented a strong regulatory draft for decentralized finance (DeFi) as part of discussions on regulating the virtual asset (cryptocurrency) market, drawing strong opposition from the industry. The industry has even criticized the proposal as effectively a "DeFi ban."

On the 9th (local time), Politico reported that the document, drafted by Democratic senators, states that any individual or company that directly interacts with users in the operation of DeFi must register with the U.S. Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC). It reflects an intention to classify and supervise all businesses that effectively provide DeFi services as brokers.

In response, the industry has criticized that the U.S. is attempting to neutralize DeFi services. Jake Chervinsky, general counsel at Variant, wrote on his X that "this regulatory draft effectively brings all participants in the virtual asset market under regulation," and that "this is not a starting point for negotiation, but closer to a checklist of requirements intended to neutralize the bill."

Summer Mersinger, head of the Blockchain Association, also said in a statement that "this draft is at a level that would effectively ban DeFi, wallet development, and open-source applications in the U.S.," adding "the current wording is impossible to comply with and will ultimately lead to the exodus of responsible developers overseas."

The draft includes provisions to empower the Treasury Department, the Federal Reserve (Fed), and others to identify "actors that can be held responsible for DeFi activity." It specifies regulating individuals or groups that generate revenue from or operate/distribute DeFi, and exempts pure protocols that do not generate revenue if they are "sufficiently decentralized."

It also includes a provision exempting open-source software developers from legal liability, but only if they do not directly operate the technology and generate revenue. This is one of the key issues that the DeFi industry has most feared.