The Breakdown - Crypto Regulation Hits a DeFi Wall

Episode Date: December 9, 2025

A crypto regulatory update looking at why the long-promised market structure bill is likely slipping into next year as negotiators get bogged down in stablecoin yield, conflict-of-interest language, and the thorny problem of DeFi. The episode also covers the SEC’s increasingly sharp divide with TradFi over tokenization rules and a surprising bit of good news from the CFTC on approved spot markets, setting the stage for a pivotal regulatory year ahead. Headlines at the end. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/@TheBreakdownBW Subscribe to the newsletter: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://blockworks.co/newsletter/thebreakdown⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownBW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. What's going on, guys? It is Monday, December 8th, and today we are doing a crypto regulatory update. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right, friends, well, the market structure bill might have to wait until next year as the policy questions get complicated. Coming out of the government shutdown, GOP leaders set a bold goal of getting the market structure bill finalized and into a markup session by the end of the year.

There were strong signs of progress in the following weeks as Democrat leaders were invited to bipartisan negotiation sessions in an attempt to reach an accord on final language. However, with just a couple of weeks left in Washington, it now looks like the market structure bill is going to get punted into next year. Variant Fund Chief Legal Officer Jake Chavinsky wrote on Thursday night, The Senate is working very hard to get this done, but the closer they get, the more complex it becomes. I'm not betting on a markup this month. Three issues are holding up the bill, stable coin yield, conflicts of interest, and defy. He explained that neither party wants to push the bill to a markup hearing unless they're certain they have the votes. During a markup, lawmakers read through and vote on possible amendments, finalizing the language

before the bill is put to a floor vote. According to Chivinsky, at this stage, the disputes are still widespread among both parties, so more negotiation is required. Chavinsky explained the nature of the three contentious areas. Prohibition of stablecoin yield has been the big ask from the banking lobby throughout the year. They got a prohibition into the Genius Act, but Stablecoin issuers immediately found a loophole and started offering rewards through third parties. Lawmakers were told this issue would be reopened in the market structure bill specifically, so they would waive through the Genius Act over the summer. Regarding the current status quo, Chravinsky wrote,

Banks hate this. They call this obvious plain reading of the text a loophole and wanted expanded in market structure. set aside the silliness of the banks asking to amend a law that they just supported, and to put stable coin content in a bill about market structure. Nonetheless, the banks are influential, and they might be able to get a few senators to agree. That could be enough to kill the bill. Regarding conflicts of interest, Democrat lawmakers have consistently called for language to restrict the president's crypto dealings. The issue was punted from the Genius Act, but has only grown in importance since then. One of the interesting wrinkles is that it's not clear that Congress can

actually restrict the president, so Democrats would be asking for something that steps outside the power of Congress. Trivinsky wrote, Some Democrats have said they won't vote for market structure unless the bill has language that restricts the president's family from doing business in crypto. The politics are simple and obvious, but a solution to move the bill forward is not. Finally, he came to Defi, which is the most technically complex issue facing the bill. The concern is that Defi doesn't allow the same AML and KYC compliance rules as the traditional banking sector.

So far, the proposed solutions have served as a backdoor defy ban, whether intentionally or unintentionally. It's simply technically difficult to legislate KYC into Defi without breaking its foundation of permissionless finance. Chivinsky wrote, let's be clear, market structure legislation is about centralized platforms that exercise custody and control over user funds and transactions. The only thing the bill should do with defy is protect it. Sadly, but not surprisingly, Tradfai disagrees. Some Tradfai incumbents have been pushing Congress to save their regulatory moat by treating pretty much everyone in crypto as an intermediary, developers, validators, you name it. That refers, by the way, to a comment letter from Citadel, which we'll discuss

in the next section of the show. Chivinsky continued, there is no market structure bill without developer protections because there is no crypto without developer protections. Hopefully the whole industry will hold this line, even an especially centralized crypto companies dying to do a bill. On this, there is no room for compromise. So with that being the state of play, it kind of seems like there's no room to get the market structure bill into a markup hearing this year. This week, Congress will be dominated by the Must Pass National Defense Authorization Act. And while it looks like most of the issues around the NDAA have been hashed out, passing that massive omnibus bill is never a simple process. There are simply too many other bills tacked on

for the process to be clean and easy. Next week is a shortened week with lawmakers leaving D.C. on Thursday night for the Christmas break. And as we've been talking about for months now, getting things done on next year's legislative session isn't a given. Politics get much harder in an election year and the midterms will make moving legislation all but impossible. by around the summer. Still, administration figures continue to push for the bill to get finalized quickly. Speaking with CNBC on Tuesday, SEC Chair Paul Atkins was asked if the bill will pass before the end of the year. He commented, we'll see. We're providing technical assistance. I can't prognosticate, but we're on track and we'll be able to forge forward. While time is of the essence,

Trevinsky argued that this is also the industry's one and only shot to get the legislation right. He wrote, given the complexity of these issues and the short timeline before the holiday break, Don't be surprised if we're still working on market structure in January. There's nothing more important than getting this right. We won't have a second chance. Legacy internet and infrastructure are brittle, plagued by downtime, coverage gaps, and outdated financing models. Communities and builders are left behind while capital sits locked out.

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regulate Defi protocols as exchanges. They wrote, granting broad exemptive relief to facilitate the trading of a tokenized share via defy protocols would create two separate regulatory regimes for the trading of the same security. The outcome would be the exact opposite of the technology-neutral approach taken by the Exchange Act, and would instead preference one technology over all others. Citadel argued that DeFi protocols shouldn't be exempted from the rules as that would undermine fair access principles, market surveillance, anti-front-running rules, and other investor protections. This argument has been made before, and was core to the Gensler SEC's approach to defy.

The industry view, meanwhile, is broadly that these rules are impossible to comply with, so attempting to enforce them would function as a de facto defy ban. Said blockchain association CEO and former SEC Commissioner, Summer Mercinger, regulating software developers as if they were financial intermediaries would undermine U.S. competitiveness, drive innovation offshore, and do nothing to advance investor protection. She added, We urge the SEC to reject this overbroad and unworkable approach, and instead focus regulatory attention on actual intermediaries who stand between users and their assets.

In response to the letter, Uniswop CEO Hayden Adams tweeted, First, Ken Griffin screwed over Constitution Dow. Now he's coming for Defyc, asking the SEC to treat software developers of decentralized protocols like centralized intermediaries. Bet Citadel has been lobbying behind closed doors on this for years. Okay, that's all pretty bad, but the actual nerve for one of their arguments to be that there is no way for DeFi protocols to provide fair access of all things. Makes sense the king of shady Tradfai market makers doesn't like open source peer-to-peer tech that can lower the barrier to liquidity creation. Now, on the panel, Samara Cohen, the head of global market development at BlackRock struck a conciliatory tone, noting that the panel

had, quote, distinct paths and perspectives represented. She thought that the difference of opinion suggested that there's probably more than one solution. Jonah Platt, managing director and U.S. head of government and regulatory policy at Citadel Securities, tried to give a little commenting, let me be clear, we believe the tokenization of U.S. equities represents another promise and has the potential to further benefit investors. However, he continued, we should identify the rules that don't make sense, and we should change them. But the suggestion that we should just grant blanket exemptive relief, and not do that by rule-by-rule analysis, strikes this as very dangerous because the U.S. equity market is of such fundamental importance. We should take the time to get this

right. Galaxy Digital head of firm-wide research, Alex Thorne, rejected this as a bad faith argument. In his written submission, he said, let me be clear, we are not advocating for a future without rules, but many of our rules were drafted with an unspoken assumption. Investors cannot transact without intermediaries. Public blockchains fundamentally challenged that assumption. Today, there exist decentralized systems that operate autonomously, without a controlling group, and whose transparency prevents theft, favoritism, market disruption, or hidden fees. They embody principles that regulators have spent decades trying to enforce through oversight alone. Predictably, not everyone welcomes this progress. Some entrenched intermediaries are fighting

to preserve regulatory moats under the banner of investor protection. In practice, they are protecting their margins, not investors. Some have even proposed that software developers should register with the commission, a notion that is not only unworkable, but also, un-American. You will hear supporters of the status quo call for years-long rulemaking, for applying outdated frameworks to systems they were never designed for, or for procedural hurdles meant only to delay competition. This is not about investor safety. It's about incumbents shielding themselves from innovation. Now, the notion of delay has been one of the biggest issues with submissions like Citadel's. On their face, they appear reasonable. Broad exemptions are a

core solution to a nuanced issue, so tailored rulemaking is always preferable. However, rulemaking is often a multi-year process with no guarantee of success. The SEC adopting Citadel's proposal could mean that Defy is still in the gray area for years to come, ensuring that tokenization is the exclusive domain of TradFi. Thankfully, the current SEC seems to be heavily biased towards action. During his statements, Chairman Atkins said, tokenized shares risk becoming nothing more than conversation pieces if their owners cannot trade them competitively in liquid on-chain environments. But making this possible requires the commission to think carefully about how our regulatory mandate intersects with technological realities.

Akin's signature policy over the past month has been a so-called innovation exemption that would allow tokenized securities to trade in defy. Commissioner Hester Purse also supports this approach. In a speech ahead of the panel, she said, we do not have the luxury of time in tackling these questions. tokenization of U.S. equities is already happening. Anybody can spin up a liquidity pool or launch a trading protocol that enables investors to get exposure to our equity's markets. Only the quick, careful, and creative development of a workable regulatory framework for the issuance in trading of tokenized securities will provide American investors with the protections they have come to expect when trading U.S. equities. Otherwise, American investors will buy

tokenized securities overseas. Commission staff is working on a tailored innovation exemption exemption that would permit this activity in the United States with strong investor production guardrails, including commission oversight. The tone from the SEC was broadly that the financial institutions were in the room to debate what the innovation exemption should look like, not whether or not it should exist. Still, this is a pivotal moment in crypto regulation, and some believe the industry is taking their eye off the ball. Remarking on the latest controversy in Defy, Austin Campbell tweeted, Salana and Bass acting like drunks wearing inflatable rings screaming at and splashing each other, while the shark fin of Citadel quietly breaches the

surface of the water in the background is the most crypto thing ever. Lastly today, a little good news. On the other side of the regulatory house, the CFTC, has approved spot crypto trading on regulated exchanges. Bitnomial has become the first CFTC regulated firm to offer approved spot markets for crypto, and they're unlikely to be the last. Announcing the approval acting CFTC chair, Caroline FAM, described this as a, quote, new golden age for innovation in America. The approval follows joint guidance from the SEC and CFTC in September, which said registered exchanges are not prohibited from offering crypto spot markets. It's also an interesting example of the existing power of regulators. No new laws have been passed on this matter, so the approval could have come at any

time over the past decade. The market structure bill will give the CFTC the ability to write new rules specifically dealing with crypto spot markets, as well as vesting them with clear enforcement authority over the market. But the regulator can still achieve a great deal using their existing powers. Regulated markets for spot crypto could be a huge deal for institutional exposure. Until now, there's been no real way to access crypto on a regulated exchange other than through the ETFs. Firms can now trade the underlying directly while staying within compliance boundaries. Now, that could be a distinction without a difference for many, given the wide availability of ETFs and regulated crypto derivatives, but it does give banks and other firms a way to

access spot markets directly as they build out their own crypto infrastructure. Anyways, friends, that is a story. I am not particularly optimistic on market structure, but that's where it stands today. For now, that's going to do it for today's breakdown. Appreciate you listening, as always, and until next time, be safe and take care of each other. Peace.