Crypto Slams Stablecoin Change in Senate Market Structure Bill – DL News

Stablecoin issuers will be prohibited from paying passive yield under the latest version of a landmark crypto bill filed by U.S. senators late Monday, marking a major victory for banks that had warned the tokens could harm their ability to lend to businesses and home buyers.

But it includes important protections for software developers such as Tornado Cash co-founder Roman Storm, who was convicted of operating an unlicensed money transfer business after a three-week criminal trial in New York last year.

The clarity law must be voted on Thursday by the Senate Banking Committee. A separate vote on a version prepared by senators on the Agriculture Committee was postponed until the last week of January.

Most of the mammoth bill attempts to settle a long-running debate over the regulatory status of cryptocurrencies. The United States’ top financial regulators, the Securities and Exchange Commission and the Commodity Futures Trading Commission, have both attempted to assert jurisdiction over crypto markets under the Biden administration.

Which regulator?

The Senate version of the Clarity Act would require the SEC to regulate so-called ancillary assets – crypto assets whose value depends on the efforts of their issuers.

While most other crypto assets would be considered digital products regulated by the CFTC, the SEC would be responsible for deciding whether a given token or cryptocurrency meets the definition of an ancillary asset.

“This is going to be a problem for many projects,” Justin Slaughter, vice president of regulatory affairs at crypto venture capital firm Paradigm, wrote on X.

“The SEC always starts with authority over virtually every token. You can imagine a future SEC that tries to control projects and views everything as an ancillary asset.”

Companies or individuals issuing an ancillary asset would be required to regularly disclose the asset’s tokenomics, distribution, crypto experience, finances, identities, their project roadmap, a “plain English” description of the project, project fees, its code, and much more.

Although costly, any sufficiently decentralized project can avoid SEC oversight – and, therefore, the bill’s myriad disclosure requirements. Assets that raise less than $5 million and have an average daily trading volume of less than $5 million would also be spared from these requirements.

But the bill goes much further than previous versions, which focused largely on token classification.

Stablecoins

On Tuesday, cryptocurrency advocacy firms denounced language in the bill that strengthens a provision in last year’s stablecoin legislation prohibiting issuers of so-called payment stablecoins from offering a yield.

The industry has argued that the stablecoin law allows third parties, such as crypto exchanges, to offer “rewards” in the form of annual interest. The banks, in turn, urged Congress to close this “gap.”

The Senate’s Clarity Act does just that, prohibiting any form of return for simply holding a stablecoin. Instead, it allows companies to offer rewards or incentives on activities such as transactions, payments, transfers, remittances and provide liquidity in DeFi protocols.

The industry presented the compromise as a gift to the banks – and as a matter of national security.

“If Congress weakens dollar-based stablecoins by banning rewards to protect legacy revenue, it gives foreign central bank digital currencies a competitive advantage just as global settlement is moving on-chain,” Dan Spuller, executive vice president of the Blockchain Association, wrote on X.

But there are signs that banks are pushing to do more.

“Dear banks, perhaps now is the right time for you to accept the proposed deal on stablecoin rewards and yield,” White House official Patrick Witt wrote on X.

Challenge

But the bill includes a major victory for the crypto industry: language protecting non-custodial software developers from prosecution under money transfer laws.

US prosecutors have charged unlicensed money transfer software developers with creating – and allegedly operating – cryptocurrency mixers such as Tornado Cash and Samourai Wallet.

Last year, a jury found Tornado Cash co-founder Roman Storm guilty of violating the Money Transmitting Act. He appealed his conviction.

Furthermore, the developers of Samourai Wallet pleaded guilty to violating this law. They were sentenced to five years in prison.

DeFi proponents argue that prosecutors’ legal theory threatens the very principle of decentralized finance because these protocols have never taken custody of users’ cryptography.

Although truly decentralized protocols have few or no obligations under the bill, centrally controlled interfaces that facilitate access to these protocols would have to comply with several requirements intended to combat cybercrime.

Websites offering access to DeFi protocols will be required to block sanctioned addresses and monitor transactions for signs of money laundering or other criminal behavior.

While some complained about the bill on social media, others said compromises were inevitable.

“For crypto and trading stakeholders, remember that for every Market Structure Project issue that gives you heartburn, you get multiple pieces of candy,” Witt wrote. “That’s how it works.”

Aleks Gilbert is DL News’ DeFi correspondent based in New York. You can contact him at aleks@dlnews.com.