The recently released design of the CLARITY Acta major piece of legislation aimed at regulating the crypto market has sparked a wave of criticism from supporters within the community.
Initially, the bill was intended to provide protections for developers. However, expert commentary suggests that this opens the door to continued prosecution of developers and improves oversight measures for users of non-custodial software.
Draft law for crypto market structure lacks essential protection
Market expert Ryan Adams marked Another key issue in the crypto bill, which states that if banks are successful in eliminating the stablecoin yield provisions within the CLARITY Act, it would indicate that the Senate is prioritizing the interests of the banks over those of the general public.
Adams’ concerns were echoed by several users thought that the strategy appears to be orchestrated to benefit banks by controlling how returns are managed and distributed.
Related reading
An independent report from The Rage amplifies these concerns and explains how the proposed design contains so-called developer protections that may fall short. Notably, there are no safeguards against the rigorous implications of the Bank Secrecy Act (BSA) for self-custodial wallets.
Additionally, the draft hints at potential applications to decentralized finance (DeFi) that could allow agencies to implement Travel Rule-like regulations, along with anti-money laundering (AML) measures targeting web-based interfaces and blockchain analytics companies.
According to the report, the Senate has already received 137 amendments to the draft ahead of the markup, scheduled for January 15. Blockchain Regulatory Certainty Act (BRCA) is also included, which is considered essential for developer protection.
BRCA loopholes
While the BRCA provides exemptions under the AML and terrorist financing rules, it continues to leave developers vulnerable to liability for the actions of users using their software.
The BRCA states that ‘non-controlling’ developers – defined as those without unilateral control over digital asset transactions– will not be categorized as money transmitters under the relevant laws. However, this only alleviates certain charges and does not prevent criminal liability for those whose software is misused.
Pro-crypto Senator Cynthia Lummis commented on this aspect of the BRCA, indicating that it retains all necessary AML protections, implying that despite all the positives, the liability remains a looming threat to developers.
At the same time, the “Keep Your Coins Act” includes provisions in its draft stating that federal agencies cannot prohibit the self-custody of digital assets. However, further provisions assert that this right does not prevent the application of laws regarding illegal financing, thus creating loopholes for government intervention.
The Securities and Exchange Commission’s (SEC) previous attempts to impose a brokerage rule that would classify decentralized financial services as intermediaries requiring reporting requirements have been repeated in the current draft.
This time, the Senate Banking Committee appears to be leaning toward a similar position regulatory approachaiming to provide guidance on BSA and AML compliance for “non-decentralized financial protocols,” raising concerns about the implications for crypto developers maintaining and updating protocols.
Privacy concerns are increasing
Among the new sections, the Senate Banking Committee is introducing a concept called “Distributed Ledger Application Layers,” which the report claims will invite scrutiny and create compliance obligations for software applications that allow users to interact with decentralized financial protocols.
The provisions also force the Treasury Department to develop additional oversight mechanisms to limit exposure to these risks illegal financing risks identified through distributed ledger analysis tools, effectively ensuring that crypto transactions are closely monitored.
Related reading
As it stands, the lack of robust protections for developers and users involved in privacy-enhancing technologies in this current draft suggests that the Senate’s proposed market structure will do little to protect non-protective developers.
Instead, it increases their vulnerability to government surveillance and user surveillance. Ultimately, these developments pose significant challenges for privacy software users and developers.
Featured image of DALL-E, chart from TradingView.com