ConsenSys Legal Expert Criticizes Senate Draft: DeFi Still Legally Vulnerable
As the U.S. Senate Agriculture Committee released its long-awaited draft of the crypto market structure bill, hopes for clarity in decentralized finance (DeFi) regulation were quickly dimmed. Legal experts and industry stakeholders remain divided, with Bill Hughes, senior counsel at ConsenSys, sharply criticizing the proposed framework for failing to provide meaningful legal safeguards for DeFi operators.
The draft, while seen as a step forward in defining the roles of financial regulators like the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), leaves the DeFi sector in a precarious position. Rather than establishing clear guidelines or protections, the section on DeFi merely includes a disclaimer stating that the committee is “seeking further feedback,” signaling that lawmakers have yet to reach consensus on how to handle decentralized technologies.
Hughes emphasized that although the draft extends protections to individual users of self-custody wallets and developers of open-source blockchain protocols, it falls short in shielding those who build or operate DeFi platforms. According to him, anyone involved in managing decentralized exchange (DEX) interfaces, lending protocols, or tools that facilitate financial transactions on the blockchain could face legal action under the current language.
“The rule applies only to personal use—not to those acting as custodians, fiduciaries, or providers of financial services to others,” Hughes explained. “This is not a safe harbor for those developing or operating DeFi interfaces in general.”
This regulatory ambiguity could have significant implications. With the Agriculture Committee completing its draft, the spotlight now shifts to the Senate Banking Committee, which oversees the SEC. The two committees must harmonize their approaches, particularly on DeFi, before the bill can advance to a Senate floor vote. However, the lack of consensus on how to regulate DeFi remains one of the key barriers to progress.
The CLARITY Act proposes a bifurcated regulatory model, where the CFTC would oversee crypto commodities, derivatives, and custody services, while the SEC would retain jurisdiction over securities, investor protections, and DeFi. This division has further complicated regulatory efforts, as it requires coordination between separate Congressional committees with differing priorities and perspectives.
While some policymakers view DeFi as a frontier of innovation, others, particularly those aligned with more progressive agendas, express concern over investor protection and money laundering risks. This ideological divide continues to delay the formation of a coherent policy framework.
Despite the uncertainties, the DeFi Education Fund, an advocacy group for decentralized technology developers, praised some aspects of the proposal, particularly the recognition of self-custody solutions as legitimate and protected. Still, the lack of comprehensive legal protections for DeFi operators casts a long shadow over the bill’s future.
Following the release of the draft, market watchers noted a slight rebound in the perceived odds of the CLARITY Act passing by 2025. Forecasts had dipped by 20% in recent weeks, but the new draft helped push expectations back to a 37% chance, reflecting cautious optimism. However, if the debate around DeFi remains unresolved, it could push final approval of the legislation into 2026 or beyond.
The broader implications for the crypto industry are significant. Without a clear legal framework, developers and entrepreneurs in the DeFi space risk legal exposure, potentially stifling innovation and driving talent and capital offshore. Many argue that the U.S. risks falling behind global competitors who are moving more decisively to regulate and support blockchain-based financial systems.
Moreover, the uncertainty surrounding DeFi regulation may have a chilling effect on institutional investment. Firms seeking to build or integrate with decentralized protocols could hesitate without legal clarity, slowing down adoption and undermining the potential of blockchain to transform financial services.
Experts also warn that the lack of a safe harbor for DeFi front-end operators could lead to regulatory overreach. By treating interface developers and protocol contributors as financial intermediaries, the current draft risks conflating code deployment with financial service provision, a move that could have unintended consequences for open-source innovation.
Amid these concerns, industry advocates continue to push for a more nuanced approach that recognizes the unique characteristics of decentralized systems. They argue that regulation should focus on outcomes—such as fraud prevention and transparency—rather than applying traditional financial service frameworks to emerging technologies.
In the coming months, the crypto industry will be watching closely as the Senate Banking Committee refines its position. Whether agreement can be reached on DeFi provisions will likely determine the ultimate fate of the CLARITY Act and the broader regulatory landscape for digital assets in the United States.
Without a coordinated and forward-looking strategy, the U.S. risks losing its leadership role in the global crypto ecosystem. For now, the DeFi sector remains in limbo, caught between innovation and legal uncertainty, waiting for lawmakers to decide its future.