A new proposal by several U.S. Senate Democrats has triggered sharp criticism from the crypto industry, with experts warning that it could effectively ban decentralized finance (DeFi) in the United States and stifle blockchain innovation.

According to a report by Punchbowl News, Democratic members of the Senate Banking Committee introduced a counter-proposal to the bipartisan crypto market structure bill on Thursday. The plan would give the U.S. Treasury broad authority to label DeFi protocols as “restricted” if deemed risky — effectively banning Americans from using them or earning income through those platforms.

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The proposal also seeks to apply Know Your Customer (KYC) rules to decentralized application frontends, including non-custodial wallets, and remove liability protections for open-source crypto developers.

“It Doesn’t Regulate Crypto — It Bans It”

Crypto policy attorney Jake Chervinsky called the proposal “the most anti-innovation, anti-crypto framework we’ve ever seen,” warning it could undo years of bipartisan progress on digital asset legislation.

“It’s so bad. It doesn’t regulate crypto — it bans crypto,” Chervinsky said. “This would allow the Treasury to blacklist entire protocols and punish anyone earning recurring revenues from them. It’s not just anti-crypto, it’s anti-innovation.”

MetaLeX Labs founder Gabriel Shapiro echoed similar concerns, saying the plan could criminalize legitimate DeFi participation. “Any U.S. national who uses these protocols and earns recurring income could face penalties,” he noted, calling the proposal “a direct attack on digital property rights.”

Lawmakers behind the proposal reportedly include Mark Warner, Ruben Gallego, Andy Kim, Raphael Warnock, Angela Alsobrooks, and Lisa Blunt Rochester. The move stands in contrast to the CLARITY Act, which passed the House in July with broad bipartisan support (294–134) and was designed to bring regulatory clarity without overreach.

Conflicts With the RFIA’s Bipartisan Framework

The Democrats’ proposal also appears to undermine the Responsible Financial Innovation Act (RFIA) — a bipartisan Senate draft introduced on September 9. The RFIA aims to give the Commodity Futures Trading Commission (CFTC) oversight over crypto spot markets, limiting the Securities and Exchange Commission’s (SEC) jurisdiction, while also offering legal protections to crypto developers and open-source projects.

Industry groups argue that the new proposal would reverse progress made under the RFIA and the earlier CLARITY Act, potentially driving U.S.-based developers and liquidity providers offshore.

“Good Policy Doesn’t Punish Decentralization”

Zunera Mazhar, Vice President of Government and Policy Affairs at the Digital Chamber, criticized the plan as “heavy-handed and counterproductive,” warning that it could drive blockchain innovation out of the country.

“Good policy doesn’t punish decentralization,” Mazhar said. “It protects consumers, preserves innovation, and targets illicit finance where it actually happens — not by banning technology itself.”

Summer Mersinger, CEO of the Blockchain Association, added that the proposal would make compliance “virtually impossible” for DeFi projects, exchanges, and developers operating within the U.S.

As the U.S. government continues to operate under shutdown conditions, the debate underscores a growing divide in Washington over how to regulate crypto — with Democrats and Republicans increasingly split between containment and innovation.