Crypto community may still abandon U.S. market structure legislation if DeFi requirements are not addressed

DeFi Developers Seek Stronger Protections in Upcoming U.S. Crypto Legislation

As the U.S. Senate prepares to unveil the latest version of its cryptocurrency regulatory bill, concerns are mounting within the decentralized finance (DeFi) community. Industry advocates warn that if the new draft fails to adequately safeguard software developers, DeFi supporters may be forced to oppose the very legislation they have long championed.

Currently, it is the established financial sector—particularly groups like the Securities Industry and Financial Markets Association (SIFMA)—that are most actively resisting DeFi’s requests, according to industry representatives. This pushback comes as two Senate committees are finalizing their plans to vote on the crypto market structure bill in the coming week, marking a pivotal moment for the legislation’s progress in the Senate.

Amanda Tuminelli, Executive Director of the DeFi Education Fund, expressed cautious optimism in a conversation with CoinDesk. She noted that while her organization has engaged in constructive discussions with Senate staff and SIFMA, significant uncertainties remain. “I am concerned that traditional finance representatives at the negotiating table do not share our commitment to fostering and protecting innovation,” Tuminelli remarked.

SIFMA has declined to issue a public statement on the matter, aside from a recent position regarding tokenized securities.

Last August, a coalition of crypto industry leaders—including Coinbase, Kraken, Ripple, a16z, Uniswap Labs, and over a hundred other organizations—sent a letter to senators warning that they could not support any market structure bill that failed to protect software developers. Many signatories represented more centralized segments of the crypto sector.

Key Priorities for DeFi Advocates

As the legislative text is finalized, DeFi stakeholders are focused on several critical issues they believe are essential for the future of decentralized technology:

• Developer Protections: Previous drafts of the Senate bill and the House’s Digital Asset Market Clarity Act included provisions to shield DeFi software creators. However, these protections remain uncertain. Advocates argue that holding developers legally responsible for how others use their code would undermine the entire DeFi ecosystem. Tuminelli emphasized the need for “comprehensive and robust” safeguards, ensuring that developers who do not act as intermediaries are not treated as such under securities and commodities laws.
• Self-Custody Rights: The ability for individuals to control their own digital assets is a foundational principle for the industry. While lawmakers had previously been receptive to this argument, some traditional financial institutions now question whether crypto firms should be allowed to offer self-custody solutions to their clients without violating securities regulations. Recent negotiations have revealed that self-custody remains a contentious and unresolved issue. Tuminelli described this as a “red line” for DeFi advocates.
• Money Transmitter Classification: Legislation introduced by House Republican Whip Tom Emmer—the Blockchain Regulatory Certainty Act—clarified that developers and service providers who do not control customer funds should not be classified as money transmitters, a designation that applies to companies like PayPal and Venmo. The Senate has incorporated this language, but its status remains under negotiation. If developers are categorized as money-services businesses, they would be subject to the Bank Secrecy Act’s strict anti-money laundering requirements.
• Addressing Illicit Finance: Lawmakers are expected to add provisions aimed at curbing the use of cryptocurrencies for illicit activities such as money laundering, ransomware, and the financing of criminal or terrorist groups. DeFi insiders worry that these measures could empower the Treasury Department to blacklist certain protocols or developers. Imposing Bank Secrecy Act obligations on developers is seen as unworkable, since they do not collect the customer information required for compliance.

Awaiting the Final Bill Language

The extent to which the DeFi industry will support or oppose the legislation hinges on the final wording of the bill, which is expected soon. While Republican lawmakers are moving quickly toward committee votes, Democratic negotiators remain engaged in ongoing discussions. On Friday, Senator Cynthia Lummis, one of the Republican negotiators, shared a photo on social media that appears to show the first page of a draft of the Responsible Financial Innovation Act.

Update (January 9, 2025, 21:41 UTC): This article has been updated to include SIFMA’s response.