DeFi Education Fund Warns Senate: Heavy-Handed Regulation Could Crush DeFi Innovation
Decentralized finance faces a regulatory crossroads—and the stakes couldn't be higher.
The Pushback Begins
A coalition of DeFi advocates fires warning shots at Capitol Hill, arguing that clumsy legislation could stifle the $100B+ sector before it hits its stride.
Why It Matters
With senators drafting bills that could treat DeFi protocols like traditional banks, the industry's core promise—permissionless innovation—hangs in the balance. Never mind that most lawmakers still can't explain smart contracts without reading from a cheat sheet.
The Bottom Line
Regulate in haste, repent at leisure. The crypto genie won't go back in the bottle—but overzealous bureaucrats might just drive it offshore.
DEF Calls for Clear DeFi Rules, Developer Protections in Senate Response
The DEF’s response pushes for four key pillars, including distinguishing between DeFi developers and intermediaries, defining which entities are required to register with federal authorities, setting decentralization criteria, and ensuring technology-neutral rulemaking.
These suggestions come amid the Senate’s call for public feedback on the RFIA, which builds on the earlier CLARITY Act.
Lawmakers say they aim to strike a balance between market growth and financial oversight, but DEF argues that a nuanced understanding of decentralized systems is essential.
One of the more urgent issues raised in the letter involves the ongoing federal case against Tornado Cash developer Roman Storm.
DEF criticizes current FinCEN guidance used in the prosecution, warning that treating non-custodial software code as a financial service sets a dangerous precedent.
“Software that does not take custody or control should not be regulated as an intermediary,” DEF states, urging legislative clarification.
Today, the DeFi Education fund team submitted a response to DeFi-related questions posed by @BankingGOP’s Digital Asset Market Structure RFI & recently published discussion draft of market structure legislation.
We are honored to have leading DeFi builders, investors &… pic.twitter.com/ZXWleD9S7I
The coalition also emphasized the need for federal preemption to override conflicting state laws.
According to DEF, without preemption, well-funded traditional financial players could exploit state-level loopholes to target DeFi developers and suppress emerging competition.
Andreessen Horowitz Flags Gaps in Draft Crypto Bill
On Thursday, Andreessen Horowitz (a16z) also urged US lawmakers to revisit and revise the draft crypto regulation bill, warning that the current proposal could open legal loopholes and weaken investor protections.
While the draft seeks to clarify the regulatory landscape for digital assets, a16z argues that the framework as written poses legal and structural risks, especially around the treatment of “ancillary assets.”
Ancillary assets refer to digital tokens sold alongside investment contracts, typically without providing buyers with equity, dividends, or governance rights.
a16z said using this category as the foundation for new legislation “without significant modifications” is problematic.
The firm believes this structure contradicts the Howey test, which is the longstanding legal standard for determining whether an asset qualifies as a security under U.S. law.
“Rewriting Howey,” the letter stated, “would depart from settled law and endanger investor protections.”
Instead, a16z supports the CLARITY Act’s narrower definition of “digital commodities” and recommends codifying a control-based decentralization model.
This WOULD assess whether any party retains unilateral control, operational, financial, or governance, over a blockchain system.
According to the firm, decentralization should mark the point at which an asset transitions from a security to a commodity.
