Democrats’ Efforts to Prohibit DeFi Pose Challenges to CLARITY Act

In a pivotal moment in U.S. cryptocurrency regulation, bipartisan efforts to pass the CLARITY Act, a comprehensive market-structure bill—aimed at clarifying oversight between the SEC (for securities-like tokens) and CFTC (for commodities like Bitcoin)—are grinding to a halt over Democrats’ proposed restrictions on decentralized finance (DeFi).

The CLARITY Act, which Republicans hoped to advance before the end of 2025, seeks to provide legal clarity for digital assets, building on earlier progress like the GERNIUS Act, a stablecoin bill passed earlier this year. However, a leaked Democratic counter-proposal on DeFi has ignited fierce backlash, with critics labeling it a de facto ban on core crypto innovations.

The Core Dispute: DeFi Proposal Under Fire.

At the heart of the fight is a Democratic document circulated on Thursday October 9, 2025, which would allow the Treasury Department to maintain a “restricted list” of DeFi protocols deemed high-risk. This could impose Know Your Customer (KYC) requirements on non-custodial wallets and app frontends, effectively treating them as regulated financial entities under joint SEC-CFTC oversight. Republicans, led by Senate Banking Committee Chair Tim Scott (R-S.C.), view this as overreach that ignores DeFi’s decentralized ethos and could drive innovation overseas.

• Republican Critique: Senate Banking GOP Staff Director Catherine Fuchs halted further talks via email, stating negotiations would pause “until we have an agreed upon date for markup.” A spokesperson for Scott, Jeff Naft, dismissed the proposal as “not a legislative offer,” noting it “was not written in legislative text, included multiple incoherent policy ideas, and was not a good-faith effort.” Republicans had shared drafts since June 27 and pushed back a planned September markup to September 30 for bipartisanship, but Democrats have resisted committing to a vote date.

• Democratic Defense: Sen. Ruben Gallego (D-Ariz.), a key negotiator in a group of 12 crypto-friendly Democrats, pushed back through spokesperson Jacques Petit: “Democrats have shown up ready to work but our Republican counterparts are crashing out. They asked for paper and substance, and we delivered.” Petit called demands for a markup date premature—”like setting a wedding date before the first date”—and accused Republicans of leaking the proposal to manufacture outrage. Broader Democratic concerns, voiced by Ranking Member Elizabeth Warren (D-Mass.), center on crypto’s risks to financial stability and national security.

The Elizabeth Warren Problem

Owned and operated by the banking cartels, Senator Elizabeth Warren has long been a crypto critic. Warren’s position has constantly called for killing crypto innovation and financial freedom for individuals using “fraud, instability and risks” as a cover narrative to preserve her constituency – the banking monopoly she viciously protects.

Warren pledged to build an “anti-crypto army” to enforce compliance, reinforcing her overarching framework which emphasizes that crypto must not erode existing securities laws or create “back doors” for instability.

Her rhetoric threatened the GENIUS Act and influenced highly misguided negotiations undertaken by her Democratic colleagues who have a single digit crypto IQ.

The so called “crypto-friendly” Democratic bloc—including Sens. Kirsten Gillibrand (D-N.Y.), Mark Warner (D-Va.), Angela Alsobrooks (D-Md.), and Cory Booker (D-N.J.)—insist they’re committed to a deal, but the DeFi language all but proves they’re preserving the banking cartel as Warren’s lap dogs. Gallego himself emphasized in a late-Thursday interview: “We’re going to continue working. But we are still in the fight to make sure we have a bipartisan market-structure bill.

Industry and Public Backlash – The proposal has drawn swift condemnation from the crypto sector, amplifying partisan divides. Blockchain Association CEO Summer Mersinger warned it “would effectively ban decentralized finance, wallet development, and other applications in the United States—an outcome that’s neither workable nor consistent with American innovation.”

Coinbase CEO Brian Armstrong echoed this on October 9, calling it “bad, plain and simple” and a setback for U.S. leadership, potentially pushing DeFi offshore.

Advocacy groups like Coin Center have mobilized, arguing the burdens would stifle small DeFi projects and talent migration to places like Singapore or Dubai.

Stakeholder	Position	Key Quote/Concern
Republicans	Oppose DeFi restrictions; demand markup vote	“Leaking private communications… shows one side is more focused on political narratives than serious work.”
Democrats	Push for consumer protections via restricted list	“Republicans’ demand to set a markup date before text is agreed to is… nonsensical.”
Crypto Industry (e.g., Coinbase, Blockchain Assoc.)	View as innovation-killer	“Would set US crypto innovation back” (Armstrong); “Ban DeFi… inconsistent with American innovation” (Mersinger)
Senator Elizabeth Warren	Broader systemic risks and instability	Concerns over financial stability and national security

What’s At Stake

This impasse threatens to derail the bill entirely, leaving the U.S. without a unified framework amid a booming crypto market. A failure here could exacerbate regulatory uncertainty, benefiting offshore hubs and echoing the dark past.

Republicans hold leverage with their Senate majority but need Democratic buy-in for longevity. Desperate for traction in the 2026 midterms, Democrats may use this to appeal to risk-averse voters. Optimistically, the “crypto-friendly” Democrats could broker compromises, perhaps softening the restricted list into targeted AML measures.

Pessimistically, Warren’s influence might harden lines, forcing Republicans to advance a partisan version—risking veto or court challenges. As Mersinger put it, “The stakes are high for American innovation.”

Watch for markup commitments in the coming weeks; without them, 2025’s regulatory window slams shut.