The recently released draft of the CLARITY Act, a major piece of legislation designed to regulate the cryptocurrency market, has sparked significant criticism from its supporters in the crypto community. While the bill was initially intended to include protections for developers, expert analysis suggests it may instead pave the way for continued prosecution of developers and increase surveillance of users who employ non-custodial software.
Crypto Market Structure Bill Draft Seen as Lacking Key Protections
Market expert Ryan Adams pointed out another critical flaw, noting that if banks succeed in removing stablecoin yield provisions from the CLARITY Act, it would signal that the Senate is prioritizing banking interests over those of the public. Various users have echoed Adams’s concerns, arguing that this strategy seems designed to allow banks to profit by controlling how yields are managed and distributed.
An independent report from The Rage reinforces these concerns, detailing how the proposed draft’s so-called developer protections are insufficient. Notably, the draft lacks safeguards against the stringent requirements of the Bank Secrecy Act (BSA) for self-custodial wallets. It also suggests possible applications to decentralized finance (DeFi) that could enable agencies to enforce regulations similar to the Travel Rule, alongside anti-money laundering (AML) measures targeting web interfaces and blockchain analysis firms.
According to the report, the Senate has already received 137 amendments to the draft ahead of its markup scheduled for January 15. A revised version of the Blockchain Regulatory Certainty Act (BRCA), considered crucial for protecting developers, is also included.
Loopholes in the BRCA
Although the BRCA provides exemptions from AML and counter-terrorist financing regulations, it still leaves developers potentially accountable for the actions of users who employ their software. The BRCA states that “non-controlling” developers—those without unilateral control over digital asset transactions—will not be classified as money transmitters under relevant laws. However, this only mitigates certain charges and does not shield developers from criminal liability if their software is misused.
Pro-crypto Senator Cynthia Lummis commented on this aspect of the BRCA, noting that it maintains all necessary AML protections. This implies that, despite some positive elements, the threat of accountability continues to loom over developers.
Simultaneously, the “Keep Your Coins Act” within the draft includes provisions stating that federal agencies cannot prohibit the self-custody of digital assets. However, further stipulations clarify that this right does not exempt individuals from laws related to illicit finance, leaving room for government intervention.
The current draft echoes past efforts by the Securities and Exchange Commission (SEC) to impose a broker rule that would classify DeFi services as intermediaries subject to reporting requirements. This time, the Senate Banking Committee appears to be leaning toward a similar regulatory approach, aiming to provide guidance on BSA and AML compliance for “non-decentralized finance protocols.” This raises concerns about the implications for crypto developers who maintain and update these protocols.
Growing Privacy Concerns
Under new sections, the Senate Banking Committee introduces a concept called “Distributed Ledger Application Layers.” The report argues that this invites scrutiny and creates compliance obligations for software applications that enable users to interact with DeFi protocols. The provisions also require the Treasury Department to develop additional oversight mechanisms to address illicit financing risks identified through distributed ledger analysis tools, effectively ensuring that crypto transactions remain under close observation.Under close examination, the current draft of the Senate’s market structure proposal appears to offer little protection for developers and users of privacy-enhancing technologies. Instead, it seems to leave non-custodial developers more exposed to government oversight and user surveillance. These developments pose a major challenge for those who create and use privacy software.
Frequently Asked Questions
Of course Here is a list of FAQs about the criticism surrounding a crypto market bill draft and its potential for continued developer prosecution
Beginner Definition Questions
1 What is this crypto bill everyone is talking about
Its a draft law being discussed in the US Congress that aims to create a comprehensive regulatory framework for cryptocurrencies and digital assets
2 Whats the main criticism of the bill
A key section of the bill has been criticized for potentially allowing the government to continue prosecuting software developers for the actions of people who misuse their code which many see as unfair and harmful to innovation
3 What does developer prosecution mean in this context
It means that the individuals or teams who write and publish opensource blockchain code could be held legally responsible if a third party uses that code for illegal activities such as money laundering or sanctions evasion
Intermediate Impact Questions
4 Why would a bill meant to provide clarity still allow for developer prosecution
The bill tries to balance innovation with law enforcement Critics argue that while the bill offers clarity in many areas this specific provision leaves a dangerous loophole that prosecutors could use to target developers undermining the safe harbor protections the bill intends to create elsewhere
5 How is this different from current law Isnt this already a risk
Yes its already a risk under existing laws The criticism is that this new bill which was hoped to fix this ambiguity instead might codify and legitimize this approach making it a permanent feature of crypto regulation
6 Whats a realworld example of this concern
Imagine a developer creates a privacyfocused wallet If a criminal uses that wallet to hide illicit funds under this criticized provision the developer could potentially be sued or charged for aiding and abetting the crime simply for writing and releasing the software even if they had no involvement with the criminal
7 Who is leading this criticism
The criticism is prominently coming from advocacy groups like the Blockchain Association and Coin Center as well as many legal experts and developers in the crypto industry who see this as a fundamental threat to opensource development
Advanced Practical Questions