DeFi Industry Warns U.S. Senate Crypto Bill Could Undermine Innovation

The decentralized finance (DeFi) industry may be forced to oppose a major U.S. crypto regulatory bill it has long supported if the next Senate draft fails to adequately protect software developers, according to industry leaders. As Senate committees prepare to vote on a long-awaited crypto market structure bill next week, tensions are rising between DeFi advocates and traditional financial institutions over key provisions that could shape the future of blockchain innovation in the United States.

At the center of the debate are protections for DeFi software developers. Industry groups argue that holding developers legally responsible for how third parties use open-source code would effectively dismantle decentralized finance. Amanda Tuminelli, executive director of the DeFi Education Fund, said her organization has worked constructively with Senate staff and financial industry representatives, including the Securities Industry and Financial Markets Association (SIFMA), but warned that unresolved issues remain. She expressed concern that traditional finance stakeholders may not fully support policies that foster innovation in decentralized technologies.

The crypto industry has already drawn clear lines. In August, major companies such as Coinbase, Kraken, Ripple, a16z, and Uniswap Labs joined more than 100 other organizations in a letter to U.S. senators, stating they could not support legislation that fails to protect developers. Their concerns extend beyond developer liability to include self-custody rights, money transmitter classifications, and compliance with anti-money laundering laws.

Self-custody remains a critical issue, as DeFi advocates insist users must retain the right to control their own digital assets without unnecessary regulatory barriers. Another point of contention is whether developers and service providers who do not control customer funds should be classified as money transmitters, which would subject them to strict Bank Secrecy Act requirements. The industry argues this would be unworkable for decentralized protocols that do not collect user data.

There is also growing concern over potential provisions aimed at combating illicit finance. DeFi insiders worry that expanded powers for the U.S. Treasury could lead to blacklists of protocols or developers, stifling innovation without effectively addressing criminal misuse.

As negotiations continue and draft language is finalized, the crypto industry’s support will depend heavily on whether lawmakers preserve these core principles. The outcome could determine not only the fate of the bill, but also the future of DeFi innovation in the U.S.