The U.S. Cryptocurrency Legislation is Coming: What is DeFi? Why Has It Become a Focus of Regulation?

The U.S. Congress recently passed a landmark crypto market structure bill, moving it forward to the Senate. The emergence of this legislation presents an unprecedented turning point for the crypto industry. Within this regulatory framework, DeFi (Decentralized Finance) has become the most attention-grabbing focus. But many investors are still asking: What is DeFi? Why is it so important in this regulatory drama?

In simple terms, DeFi is a financial system built on blockchain technology, allowing users to directly engage in lending, trading, investing, and other financial activities without banks or brokers. Compared to traditional financial intermediaries, DeFi’s core advantages are decentralization, high transparency, and permissionless access. Because of these features, DeFi has long operated in a legal gray area—neither fully permitted nor explicitly prohibited.

How the Bill Defines DeFi: The Path to Compliance for Decentralized Protocols

The new bill makes a key decision: it clearly distinguishes the regulatory authority of the SEC (U.S. Securities and Exchange Commission) and the CFTC (U.S. Commodity Futures Trading Commission). Bitcoin and Ethereum are classified as “digital commodities” and fall under CFTC regulation; stablecoins, NFTs, and meme coins are handled separately.

For DeFi protocols themselves, the bill introduces a groundbreaking exemption clause: As long as DeFi protocols do not directly handle user funds, they can be granted liability immunity. This means truly decentralized DeFi projects won’t need to bear regulatory responsibilities like traditional financial institutions. To ensure decentralization, the bill lists seven quantifiable indicators that projects must meet to be recognized as “fully decentralized.”

This is a victory for DeFi developers—effectively, the government is opening a “safe harbor” for innovation. But in practice, what level of decentralization qualifies as “full decentralization” remains controversial. Projects will need to continuously disclose operational data until officially recognized.

Three Major Changes That Will Directly Alter the Market Landscape

First Change: Custodial Rights Are Officially Protected. The bill explicitly safeguards the right to control private keys, preventing the government from arbitrarily confiscating or restricting crypto assets. This is the victory the crypto community has long awaited.

Second Change: Institutional Capital Gate Opens. Previously, institutional investors like pension funds, insurance companies, and asset managers kept their distance from crypto assets. Now, they finally have a legal basis to enter compliantly. Market expectations suggest this will bring trillions of dollars in new capital inflows. According to the latest prices, Bitcoin is currently at $73.47K, Ethereum at $2.17K, and institutional buying could further boost mainstream asset values.

Third Change: Stablecoin Yields Become a New Concern for the Banking Sector. Banks strongly oppose crypto platforms paying interest to stablecoin holders, as this directly diverts deposits from traditional banks. The total stablecoin market has already reached $275 billion, and this diversion is a fact. Whoever can issue stablecoins and offer yields within a compliant framework will hold the future financial gateway.

Hidden Risks and Pitfalls in the Details

The bill seems perfect on the surface, but there are obvious risks:

Regulatory Resources Are Severely Insufficient. The CFTC has only 543 employees but is tasked with overseeing the massive spot crypto market. This means enforcement will be limited in the short term, but long-term, regulatory lag could occur.

Unclear Standards for Decentralization. The seven quantifiable indicators listed in the bill sound scientific, but in practice, gray areas remain. When is a project truly decentralized? Who makes the final judgment? These questions could spark future disputes.

Political Uncertainty Still Exists. With mid-term elections approaching, partisan differences on crypto policy may emerge. Certain politicians’ vested interests in the crypto industry could also influence the final version of the bill.

The Great Game Between Institutional Capital and the DeFi Ecosystem

Interestingly, the influx of institutional capital and the rise of DeFi present a balancing relationship. Large funds may prioritize mainstream assets like BTC and ETH with clear regulation, but they will also pay attention to genuinely decentralized DeFi protocols that meet new legal standards. In other words, DeFi will not disappear due to regulation; instead, it will evolve under the regulatory framework: compliant DeFi protocols will attract more capital, while projects failing to meet decentralization standards will face elimination.

Investor Strategies in Response

Based on this new landscape, investors should:

Prioritize: Mainstream assets backed by federal law, such as Bitcoin and Ethereum. BTC at $73.47K and ETH at $2.17K currently offer higher safety margins due to regulatory certainty.

Cautiously Avoid: Meme coins with no real application value and centralized DApp tokens. These assets are most vulnerable to regulatory crackdowns.

Long-Term Positioning: Truly compliant decentralized DeFi protocols and the USD stablecoin ecosystem. The bill will strengthen the dominance of USD stablecoins—whoever controls stablecoin issuance and application will hold the future DeFi gateway.

Market Outlook and the Future of DeFi

If the bill ultimately passes, Bitcoin could break through $75,000, and institutional inflows could significantly reduce market volatility; if the final version is too strict or fails, capital may flow to crypto-friendly regions like Singapore and the EU.

But regardless of the outcome, a clear trend has emerged: the crypto industry is stepping out of the gray area into a compliant era. DeFi will not disappear; instead, it will be reborn within a clear regulatory framework—those truly decentralized and practically applicable DeFi protocols will become the winners of the future.

Only by understanding the essence of this regulation—it’s not about killing DeFi but defining what kind of DeFi deserves to be legalized—can investors stand firm in the upcoming reshuffle. Over the next five years, crypto assets will be officially integrated into mainstream financial systems. Making the right choice now is more important than ever.