Galaxy Research warned that a draft crypto market-structure bill circulating in the Senate Banking Committee would significantly expand U.S. financial surveillance powers, arguing in a note that new Treasury authorities targeting decentralized finance frontends and transaction freezes could represent the largest such expansion since 2001.

The analysis focuses on certain provisions from the draft that would grant the U.S. Treasury Department new escalation tools, including an expansion of “special measure” authority over digital assets and a statutory framework allowing transaction holds without a court order.

The draft “includes substantially enhanced financial surveillance authorities to combat illicit finance than the House’s CLARITY Act,” Alex Thorn, head of firmwide research at Galaxy Digital, a major crypto and digital assets firm, wrote Tuesday.

If the measures were to become law, it would “represent the single largest expansion to financial surveillance authorities since the USA PATRIOT Act,” Thorn argued.

Thorn was referring to a post-9/11 legislative package enacted in 2001 that significantly broadened federal surveillance and financial-monitoring powers, and has since reshaped how U.S. authorities track, share, and intervene in illicit finance across the banking system.

Galaxy’s warning comes as lawmakers continue to weigh how far to extend Treasury’s role in policing crypto activity, with parallel efforts in Congress focused on clarifying market structure and limiting developer liability under federal law. The Senate Banking Committee has pushed its next markup of the crypto market structure bill to later this month.

The note describes a “temporary hold” authority that would create a formal framework for pausing digital asset transactions at the request of law enforcement, paired with a statutory safe harbor for firms that comply in good faith.

“This is a transaction-interruption lever designed to allow for streamlining of law enforcement requests along with a liability shield, making it much easier for stablecoin issuers or service providers to freeze funds quickly without a court order,” the note reads.

Galaxy also pointed to language that “explicitly creates the concept of a ‘distributed ledger application layer,” and requires Treasury to clarify sanctions and AML obligations for frontends operating in the U.S.

Some gaps and risks

Industry observers say the debate exposes unresolved trade-offs between compliance, privacy, and the practical limits of scaling crypto in real-world business use.

Debate around the bill “reflects a broader shift lawmakers are confronting” where they were previously facing concerns on “choosing between transparency and privacy,” Rob Viglione, CEO of zero-knowledge firm Horizen Labs, told Decrypt.

“Enterprises and institutions need confidentiality around sensitive business activity, while regulators need auditability. What’s changed is that this need is no longer theoretical,” he said.

Activity within Ethereum-based ecosystems is increasing, Viglione added, noting that this means regulators will need to assess how they approach compliance “without conflating auditability with expanded surveillance or shifting enforcement obligations onto non-custodial software layers.”

“Regulatory ambiguity that treats infrastructure as a monitoring tool” rather than directly “enabling controlled disclosure within existing legal frameworks” creates real risks for the industry, Viglione added.

While the draft released this week is “a step forward,” it “still leaves major gaps for real-world payroll and business payments,” Megan Knab, CEO and founder of Franklin, a financial operations platform supporting on-chain payroll, told Decrypt.

Stablecoins are “formally treated as money at the federal level,” yet “at least eight U.S. states continue to prohibit their use in wage payment,” she said, adding that this shows “the patchwork of state laws and banking policies that employers still have to navigate.”

“Until those contradictions are addressed,” businesses tied to digital assets and other on-chain operations would still be strained, and their prospects would remain “difficult, even with clearer federal guidance,” Knab opined.