DeFi Alarm Grows Over Treasury Blacklist Power in Crypto Bill

U.S. lawmakers reopened negotiations this week on a long delayed crypto market structure bill, but a proposed expansion of Treasury authority has sparked fresh backlash across the digital asset industry. At the center of the dispute sits a provision that would allow Treasury, in consultation with the SEC, CFTC, and Federal Reserve, to place decentralized finance protocols on a “Restricted List,” effectively cutting off U.S. access.

Supporters frame the language as a national security safeguard. Critics argue it creates sanctions level power with limited constraints, raising concerns about due process, privacy, and the future of open source finance.

Treasury authority draws sharp pushback

Under the draft language, Treasury could designate any DeFi protocol, front end, or associated class of entities as restricted if it determines the activity facilitates sanctions evasion, illicit finance, or threatens market stability or national security. Once listed, U.S. persons and financial institutions would be barred from interacting with the protocol unless Treasury grants a license.

The provision also directs Treasury to publish an annual report assessing DeFi risks and to evaluate whether any large protocol qualifies as “truly decentralized.” Critics say that test remains undefined and vulnerable to subjective interpretation.

Policy analyst Scott Johnsson warned that the language could allow Treasury to pressure protocols into building compliance at the base layer, effectively eliminating privacy. He said the authority mirrors sanctions enforcement and could extend beyond bad actors to neutral infrastructure.

Others pointed to past enforcement actions as a warning sign. Commentators referenced the Tornado Cash case, arguing that once Treasury designates a protocol, downstream users face criminal exposure even without direct wrongdoing. In that scenario, compliance becomes avoidance rather than remediation.

Democrats, Republicans clash over scope

The dispute reflects a broader split in market structure talks. Republicans backing the bill say clear federal rules will expand access, reduce costs, and support innovation. Sen. Tim Scott recently described the effort as a way to democratize finance through lighter oversight and clearer jurisdiction.

However, Democrats have pushed for stronger illicit finance provisions, including expanded money transmission rules and developer liability. Industry lawyers say combining those elements with blacklist authority creates overlapping enforcement tools with few limits.

Some Democratic aides acknowledge the risk. Investor advocate Sarah Brennan said negotiators must narrowly constrain delegations to Treasury to avoid unintended consequences. She noted that consumer protection language improved in recent drafts but said illicit finance provisions still raise stress.

Negotiators last debated similar language in October, when talks stalled. While sources say revisions remain possible, the renewed debate shows how quickly bipartisan momentum can fracture when enforcement power collides with decentralized design.