Criticism Arises Over Crypto Market Bill Draft's Developer Prosecutions

The recently unveiled draft of the CLARITY Act, aimed at regulating the cryptocurrency market, has sparked criticism from community supporters. Although the bill was initially designed to protect developers, many experts are concerned it may allow for ongoing prosecutions of developers and increase surveillance measures for users of non-custodial software.

Key Takeaways

The CLARITY Act draft faces backlash for failing to protect developers from prosecution.
Concerns have been raised about potential bank interests overshadowing public protection.
A report highlights inadequacies in developer protections, particularly regarding the Bank Secrecy Act.
The Blockchain Regulatory Certainty Act offers exemptions but keeps developers at risk.
Proposed regulations may impose burdensome oversight on decentralized finance (DeFi) applications.

Crypto

The Need for Essential Protections in the Crypto Market Bill

Market expert Ryan Adams pointed out a significant issue with the draft of the CLARITY Act. He warned that if banks succeed in removing provisions for stablecoin yields, it would signal that Senate priorities lean more towards banking interests rather than the needs of the public. Many users share Adams's concerns, suggesting that the legislation seems to be orchestrated to benefit banks by granting them control over yield management and distribution.

Additionally, The Rage, an independent report, raises similar alarms about the proposed bill. It claims that even though the draft includes some protections for developers, these measures may not adequately address the concerns surrounding the Bank Secrecy Act (BSA), particularly with respect to self-custodial wallets. The draft also suggests potential applications for decentralized finance (DeFi), which might enable regulatory bodies to enforce stricter measures akin to Travel Rule regulations and enforce anti-money laundering (AML) protocols for online platforms and blockchain analysis firms.

The Senate has received 137 proposed amendments to the draft ahead of its planned markup on January 15. This includes an updated version of the Blockchain Regulatory Certainty Act (BRCA), which is considered crucial for shielding developers from liability.

Addressing Loopholes in the BRCA

Although the BRCA provides some exemptions from AML and counter-terrorist financing rules, developers still face risks if users misuse their software. The BRCA clarifies that "non-controlling" developers—those who do not have unilateral control over digital asset transactions—will not be classified as money transmitters under relevant laws. However, this exemption only mitigates specific charges while leaving developers open to criminal liability for misuse.

Senator Cynthia Lummis, a pro-crypto advocate, expressed concerns that the BRCA, while retaining necessary AML protections, still poses accountability threats for developers. Furthermore, the “Keep Your Coins Act” within the draft asserts that federal agencies cannot prohibit individuals from self-custodying digital assets. However, additional stipulations suggest that this right does not prevent law enforcement from addressing illicit finance issues, thus creating potential loopholes for governmental interference.

The previous attempts by the Securities and Exchange Commission (SEC) to classify decentralized finance services as intermediaries requiring reporting obligations are reflected in this draft as well. The Senate Banking Committee seems inclined to adopt a similar regulatory framework, intending to guide compliance with BSA and AML requirements for "non-decentralized finance protocols." This proposal raises red flags regarding the responsibilities of crypto developers who maintain and update these protocols.

Recent provisions introduced by the Senate Banking Committee also bring forth a new concept known as "Distributed Ledger Application Layers.” The report suggests that this concept could invite scrutiny and compliance obligations for software that facilitates user interactions with decentralized finance protocols. Moreover, these measures could compel the Treasury to create additional oversight mechanisms to reduce risks related to illicit finance identified through distributed ledger technology, thereby keeping crypto transactions under close watch.

In conclusion, the current draft's lack of strong protections for developers and users engaged in privacy-enhancing technologies indicates that the Senate's market structure proposal will likely fail to protect non-custodial developers. Instead, it may deepen their exposure to government oversight and user surveillance, posing significant challenges for both privacy software users and their developers.

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