CRS Reviews Regulatory Framework and Policy Challenges of DeFi
The Congressional Research Service ("CRS") reviewed the structure, applications, and regulatory treatment of decentralized finance ("DeFi"), a collection of financial services built on cryptocurrency and smart contracts that operates without traditional financial intermediaries.
In the report, the CRS explained that DeFi is underpinned by three core technological components: (i) cryptocurrency, (ii) smart contracts, and (iii) oracles (i.e., "applications that link blockchain applications with data not stored on blockchains"). The CRS further explained that DeFi encompasses a range of applications, including decentralized exchanges, lending protocols, mixers (i.e., "applications that help users hide their ownership of assets by breaking the chain of custody"), and yield farming (i.e., the "practice in which crypto asset holders maximize their returns, or yield, by participating in various forms of [DeFi] at the same time").
The CRS highlighted the central regulatory policy concern that exempting DeFi platforms from requirements applicable to traditional financial services could invite regulatory arbitrage, whereby market participants migrate activity toward less-regulated, decentralized channels offering functionally similar services. The report reviewed the application of the Bank Secrecy Act and anti-money laundering regulatory frameworks to DeFi, noting that while FinCEN's May 2019 guidance took the position that money transmitter registration requirements apply to decentralized applications irrespective of business model, compliance among DeFi entities has remained limited. The CRS also discussed OFAC's 2022 sanctions against the Tornado Cash mixer and the subsequent removal of such sanctions in March 2025, observing that the episode raised unresolved questions about whether a self-executing smart contract that takes no custody of funds can be sanctioned at all.
The CRS also reviewed the current legislative landscape, noting that the CLARITY Act, passed by the House in July 2025, would establish a regulatory framework for cryptocurrency markets while largely exempting DeFi activities from its provisions. It also noted that a Senate Banking Committee draft bill on cryptocurrency market structure released in January 2026 drew objections from the Senate Judiciary Committee over a provision that critics argued would create a significant enforcement gap for illicit actors exploiting decentralized platforms. The CRS identified potential compliance solutions, including zero-knowledge proofs and blockchain monitoring tools, which were addressed in a March 2026 Treasury report issued pursuant to a GENIUS Act mandate. The CRS cautioned that enforcement of any future DeFi regulatory framework may face legal challenges under the First Amendment as well as practical obstacles arising from the open-source and permissionless nature of DeFi, which allows new participants to readily replace actors targeted by enforcement action.