DeFi and self‑custody draw sharp focus; witnesses call for tailored KYC/AML rules and clearer DeFi definitions

Members and witnesses spent a sustained portion of the hearing debating whether and how the Clarity Act should treat decentralized finance and noncustodial developers. Catherine Manarek, chief legal officer at Uniswap Labs, urged the committee to preserve legal certainty for developers who never take user funds and to enshrine protections for noncustodial software. "Companies for decades and decades, but now much more recently, software developers who never take custody or control of user assets have always been outside of the regime," Manarek testified, arguing that codifying that principle would protect builders.

Several members pressed whether broad DeFi carve‑outs would undermine anti‑money‑laundering and sanctions enforcement, noting recent enforcement actions and fines against major exchanges. Former CFTC chairman Russell Benham recommended strengthening AML/KYC measures and said that the Bank Secrecy Act framework as applied to centralized intermediaries is not sufficient for decentralized transfers. "I think we do need to go further because crypto assets are transferred on decentralized blockchains," Benham said, adding that Treasury needs more authority to address cross‑border risks.

Witnesses and members discussed implementation details the committee asked the agencies to address in joint rulemaking: how to define “mature blockchain,” how to distinguish protocol software from centralized services (interfaces and APIs), and where custody and screening responsibilities should fall for platforms that provide user-facing tools. Manarek and others recommended a separate, statutory clarification that noncustodial protocol developers not be regulated as money transmitters when they do not control user funds; she cited FinCEN guidance from 2019 that has treated noncustodial software differently.

The hearing also touched on operational questions: how exchanges and alternative trading systems might list both security‑type tokens and commodity tokens, the CFTC’s need for additional staff and budgetary resources to supervise spot commodity markets, and whether tailored disclosure and lockup requirements should attach to capital‑raising exemptions. "If you're giving the CFTC responsibilities to police this market ... you should increase the budget authority," Benham told the committee.

Members and witnesses left the session in agreement that DeFi and self‑custody are important policy choices that deserve clearer legal treatment. They differed on how broad any statutory DeFi exemption should be and what anti‑illicit‑finance measures are necessary to accompany it.