Crypto Market Bill Draft Criticized For Allowing Continued Developer Prosecution

Overview

The recent draft of the CLARITY Act, aimed at regulating the crypto market, has drawn significant criticism from community supporters. Originally intended to provide protections for developers, the draft has raised concerns about the potential for ongoing prosecution of developers and increased surveillance for users of non-custodial software.

Criticism of the CLARITY Act

Market expert Ryan Adams has pointed out that the CLARITY Act could lead to negative outcomes for the public if banks succeed in removing stablecoin yield provisions. This development suggests a prioritization of bank interests over those of individual users. Many in the crypto community share Adams’s concerns, suggesting that this legislative strategy is designed to enable banks to control the management and distribution of yields.

An independent report from The Rage supports these apprehensions, indicating that the proposed draft includes developer protections that may not be sufficient. Notably, the draft does not offer safeguards against the stringent implications of the Bank Secrecy Act (BSA) for self-custodial wallets. Additionally, there are indications that decentralized finance (DeFi) could be subject to regulations similar to the Travel Rule, which would impose anti-money laundering (AML) measures on web-based interfaces and blockchain analysis firms.

As the Senate prepares for a markup of the draft on January 15, a total of 137 amendments have already been submitted. Among these amendments is a revised version of the Blockchain Regulatory Certainty Act (BRCA), which is considered crucial for developer protection.

The BRCA and Its Limitations

While the BRCA offers some exemptions under AML and counter-terrorist financing regulations, it still exposes developers to liability for the actions of users who utilize their software. The BRCA defines “non-controlling” developers as those lacking unilateral control over digital asset transactions, exempting them from being categorized as money transmitters under relevant laws. However, this exemption does not eliminate criminal liability for developers whose software might be misused.

Senator Cynthia Lummis, a supporter of crypto, has remarked that the BRCA retains all necessary AML protections, highlighting that accountability remains a significant concern for developers.

In addition, the draft includes the “Keep Your Coins Act,” which asserts that federal agencies cannot prohibit the self-custody of digital assets. However, stipulations indicate that this right does not prevent the enforcement of laws related to illicit finance, creating potential loopholes for government intervention.

Privacy Concerns and Compliance Obligations

The Senate Banking Committee has introduced a concept called “Distributed Ledger Application Layers,” which could impose compliance obligations on software applications that facilitate user interaction with decentralized finance protocols. These provisions require the Treasury to develop oversight mechanisms to reduce risks associated with illicit financing, ensuring that crypto transactions are subject to heightened scrutiny.

As it stands, the draft lacks strong protections for developers and users involved in privacy-enhancing technologies. This suggests that the Senate’s proposal for market structure may do little to protect non-custodial developers, instead reinforcing their vulnerability to government oversight and user surveillance.

From author

The current legislative environment surrounding the crypto market is complex and fraught with challenges for developers and users alike. As discussions around the CLARITY Act and its implications continue, it is vital for stakeholders to remain informed and engaged in the legislative process. The potential for increased regulation and surveillance poses significant questions about the future of decentralized finance and user privacy.

Impact on the crypto market

• The criticism of the CLARITY Act highlights a growing concern regarding the balance of power between financial institutions and the crypto community.
• Ongoing prosecution threats to developers could stifle innovation and deter participation in the crypto space.
• The lack of robust protections may lead to increased surveillance of non-custodial software users, impacting the fundamental principles of privacy in crypto.
• The introduction of compliance obligations could complicate the operational landscape for decentralized applications, creating uncertainty for developers.
• The legislative focus on AML and BSA compliance may lead to a more restrictive environment for crypto projects, potentially affecting their growth and adoption.