Crypto decries stablecoin change in Senate market structure bill

Stablecoin issuers will be forbidden from paying passive yield under the latest version of a landmark crypto bill filed by US Senators on Monday night, marking a major victory for banks that had warned the tokens could undermine their ability to lend to businesses and homebuyers.

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

The Clarity Act is scheduled for a vote in the Senate Banking Committee on Thursday. A separate vote on a version being prepared by Senators on the Agriculture Committee was postponed until the final week of January.

Most of the mammoth bill attempts to settle a long-running debate over the regulatory status of cryptocurrencies. The US’ primary financial regulators, the Securities and Exchange Commission and the Commodity Futures Trading Commission, both attempted to claim jurisdiction over crypto markets during the Biden administration.

Which regulator?

The Senate version of the Clarity Act would have the SEC regulate so-called ancillary assets — crypto assets whose value relies on the efforts of their issuers.

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

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

“The SEC still starts out with authority over basically all tokens. You can imagine a future SEC that tries to gatekeep projects and calls everything an ancillary asset.”

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

While onerous, any project that is sufficiently decentralised can avoid SEC oversight — and, in turn, the bill’s myriad disclosure requirements. Assets that raise less than $5 million and see less than $5 million in average daily trading volume would also be spared those requirements.

But the bill goes much farther than prior versions, which were largely focused on token classification.

Stablecoins

On Tuesday, crypto advocacy firms decried language in the bill that tightens a provision in last year’s stablecoin legislation banning issuers of so-called payment stablecoins from offering yield.

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

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

The industry has framed the compromise as a handout to banks — and a matter of national security.

“If Congress weakens dollar-based stablecoins by banning rewards to protect legacy revenue, it hands foreign central bank digital currencies a competitive advantage just as global settlement moves onchain,” Blockchain Association Executive Vice President Dan Spuller wrote on X.

But there have been signs that banks are pushing for more.

“Dear banks, now might be a good time for you to take the deal being offered on stablecoin rewards and yield,” White House official Patrick Witt wrote on X.

DeFi

But the bill does include a major victory for the crypto industry: language protecting developers of non-custodial software from prosecution under money-transmitting laws.

US prosecutors charged software developers with unlicensed money transmission for creating — and allegedly operating — crypto mixers such as Tornado Cash and Samourai Wallet.

Last year, a jury found Tornado Cash co-founder Roman Storm guilty of violating the money transmission law. He has appealed his conviction.

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

DeFi proponents argue that prosecutors’ legal theory threatened the very premise of decentralised finance, as those protocols never took custody of user crypto.

While truly decentralised protocols have few, if any, obligations under the bill, centrally-controlled interfaces that make it easy to access those protocols would have to comply with several requirements meant to combat cybercrime.

Websites that offer access to DeFi protocols will have to block sanctioned addresses and monitor transactions for signs of money laundering or other criminal behaviour.

While some complained about the bill on social media, others argued the compromises were unavoidable.

“For crypto and tradfi stakeholders alike, remember that for every one issue in the market structure draft giving you heartburn, you’re getting several pieces of candy,” Witt wrote. “That’s how this works.”

Aleks Gilbert is DL News’ New York-based DeFi correspondent. You can contact him at [email protected].