Armstrong Flags Critical Risks in Senate Banking Draft Legislation

Regulatory overreach threatens to strangle innovation—again.

Armstrong's analysis reveals the Senate Banking Committee's latest draft carries hidden tripwires for the crypto ecosystem. The document, circulated quietly among stakeholders, proposes frameworks that could inadvertently criminalize standard DeFi operations and impose bank-level compliance on protocol developers.

Decentralization Under Fire

The draft's broad definitions of 'financial institution' and 'digital asset intermediary' create a regulatory net wide enough to ensnare everything from smart contract auditors to node operators. It's a classic move—draft legislation so vague that regulators get maximum interpretive power, while builders face minimum legal certainty.

Innovation Tax

Compliance costs outlined in the draft would dwarf development budgets for most projects. We're talking about KYC/AML requirements designed for traditional banks being slapped onto code that runs autonomously. The math doesn't work—unless the goal is to push innovation offshore.

Selective Enforcement Risk

Buried in the technical language are provisions that give regulators unprecedented discretion over which projects get targeted. It creates a permissioned innovation system where political connections matter more than technological merit—Wall Street's favorite regulatory model, now being exported to crypto.

The draft represents everything wrong with financial regulation: complex, costly, and perfectly designed to protect incumbents while pretending to foster innovation. As one cynical observer noted, 'It's not about protecting consumers—it's about protecting banking profits from blockchain efficiency.'

Armstrong identifies several risks associated with the recently shared Senate Banking draft

Armstrong expressed gratitude for the Senate’s collective efforts, particularly those of Senators Tim Scott and Cynthia Lummis. However, the industry executive sparked concern after alleging that the draft shared recently posed serious threats that would be difficult to address upon reaching a final vote on the Senate floor.

According to him, the primary issue concerns the rewards associated with stablecoins. Regarding this problem, Armstrong asserted that recently enacted crypto regulations, such as the GENIUS Act (Guiding and Establishing National Innovation for US Stablecoins Act), which TRUMP signed into law, permitted stablecoin issuers to offer interest. He perceived this as crucial for enabling Americans to acquire returns on their investments. 

“The banks are really trying to undermine the president’s crypto plans,” Armstrong stated. “They want to protect their profits by taking money from hardworking Americans and putting it into the hands of big banks that are making record profits.” 

Afterwards, Coinbase’s CEO contrasted stablecoins that the GENIUS Act requires to be fully backed by short-term US Treasuries with traditional fractional-reserve banking, arguing that cryptocurrencies pose minimal risk to the financial system. To further elaborate on this point, he stated that these stablecoins do not rely on fractional reserves; therefore, they should not be regulated similarly to banks.

Following his remarks, host Bartiromo asked Armstrong whether crypto platforms should be subject to regulations similar to those of banks. Examples of these regulations include deposit insurance and safeguard measures for investors.

Responding to this question, he noted that these regulations primarily aim to manage risks associated with fractional-reserve lending, and that FDIC insurance covers deposits up to $250,000 per depositor.

“If customers choose to lend out their funds, they can do so,” he said. “You don’t need a bank license for that. A bank license is necessary when you lend someone else’s money without their permission.” 

Armstrong expressed disapproval of the proposed change regarding the CFTC and the SEC

Some analysts raised concerns that stablecoins pose a serious risk to community banks. Nonetheless, Armstrong called this claim false, describing it as a calculated distraction employed by major financial institutions.

Based on his argument, assertions that stablecoins are draining community bank deposits lack substantiated evidence, and he noted that the consolidation driven by major banks poses a far greater risk since the Dodd-Frank era. 

Moreover, the industry executive condemned the Senate proposal that would make the CFTC subordinate to the SEC. In this approach, digital assets must pass through SEC oversight before potentially falling under CFTC control.

“I can’t understand why the Senate Ag Committee would make the CFTC a subsidiary of the SEC,” he said, citing the CLARITY Act, which the House passed.

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