Senate Democrats sent Republicans a counter-proposal on Thursday that stopped bipartisan crypto market talks. The plan allows the Treasury Department to create a “restricted list” for DeFi protocols labeled as too risky. It imposes Know Your Customer rules on crypto app frontends, including non-custodial wallets. It removes legal protections for crypto developers and penalizes U.S. nationals earning from restricted protocols.
Republicans immediately suspended negotiations. Senate Banking Committee Republican Staff Director Catherine Fuchs confirmed the pause, saying meetings would stop until a markup date is agreed upon. GOP members criticized the counter-proposal for lacking legislative text and a clear policy structure. They called it a bad‑faith attempt instead of a genuine effort to build a regulatory framework.
Crypto Lawyer Warns of ‘Government Takeover’ as Senate Rift Deepens
Crypto lawyer Jake Chervinsky warned the proposal could destroy efforts to establish a fair market structure. He said it undermines bipartisan progress made by the CLARITY Act, which passed the House in July with a 294–134 vote. Chervinsky called the proposal an “unconstitutional government takeover” that could effectively ban crypto instead of regulating it.
The Democratic proposal was drafted by Senators Mark Warner, Ruben Gallego, Andy Kim, Raphael Warnock, Angela Alsobrooks, and Lisa Blunt Rochester. Their move threatens the GOP’s push for landmark crypto legislation this year. Senate Banking Chair Tim Scott and other Republicans had aimed to pass a market structure bill before year‑end, but lacked bipartisan traction.
On October 7, the AFL‑CIO urged the Senate Banking Committee to reject the Responsible Financial Innovation Act. The union warned that crypto volatility could endanger workers’ retirement savings and increase systemic financial risks. This added pressure to already‑strained negotiations.
Industry Leaders Warn Crypto Plan Could Drive Innovation Offshore
Industry leaders reacted strongly. Blockchain Association CEO Summer Mersinger said the Democratic draft would make compliance impossible. She warned that responsible crypto innovation would shift overseas. Mersinger urged both parties to continue dialogue to ensure U.S. leadership in financial technology.
Digital Chamber Vice President Zunera Mazhar shared similar concerns. She said the proposal uses outdated tools to fight illicit finance while granting the Treasury excessive power. Mazhar argued the draft narrowly defines decentralization and unfairly treats frontends as intermediaries. She urged regulators to focus on real financial chokepoints and adopt risk‑based oversight aligned with global standards.
Coinbase CEO Brian Armstrong joined in the criticism. He said the proposal would harm innovation and block the U.S. from becoming a global crypto hub. Industry voices united in warning that the plan could push blockchain advancement abroad.
The counteroffer clashes with the September 7 Responsible Financial Innovation Act draft. This bipartisan version assigns spot market oversight to the Commodity Futures Trading Commission. It also limits the Securities and Exchange Commission’s reach. The draft protects DeFi developers from prosecution following the Tornado Cash and Samourai Wallet cases.
Related: Senate Democrats Reveal New Crypto Market Structure Plan
Democrats Defend Proposal as GOP Accuses Them of Stalling Crypto Talks
Senator Ruben Gallego’s spokesperson, Jacques Petit, defended Democrats’ actions. He said they provided the material Republicans requested. Petit accused Republicans of leaking the proposal to misrepresent negotiations. He compared their demand for a markup date before text agreement to setting a wedding date before the first date.
Republicans countered by stating Democrats had ignored repeated feedback requests since June 27. Tim Scott’s spokesperson, Jeff Naft, said the chairman pushed for a September 30 markup and asked Democrats several times to commit. He stated bipartisan progress was impossible without clear scheduling.