Democrats are working on tougher crypto laws: this can change

The American Democrats may be working on a completely separate bill for the crypto market. With this, the battle over the future rules in the United States seems to be entering a new phase. The plans would be significantly stricter on important points than the previously deadlocked CLARITY Act.

According to multiple sources surrounding the consultation, Democratic members of the House want to extend an earlier proposal by Maxine Waters to a complete law for the market structure of crypto.

One of the biggest changes is in supervision. The Securities and Exchange Commission (SEC) would be given more powers, while the role of the CFTC would be reduced. This is almost the opposite of the course chosen by the CLARITY Act, which would give the CFTC a greater role in spot markets.

Crypto exchanges can also face stricter requirements. Among other things, the plans would include monthly proof-of-reserve checks, so that companies would have to regularly demonstrate that they own enough crypto to cover customer balances.

In addition, there is talk of a protection system similar to the US SIPC scheme for traditional brokers. In the event of the bankruptcy of a broker or trading platform, investors are protected up to a certain amount if customer funds are missing.

Also mentioned are 24/7 customer service and restrictions on trading where a platform faces its own customers. In this way, one wants to prevent a platform from earning money from a position that is directly opposite that of its own user, because that can lead to conflicts of interest.

Another sensitive element is stricter ethical rules for federal officials. This could, for example, limit the crypto activities of President Donald Trump and other politicians. This subject was a major stumbling block to the CLARITY Act.

The new plans come after the CLARITY Act did not get enough votes in September to advance in the Senate. Almost all Republican senators supported the procedural vote, but Democratic support was lacking. 

Democrats have previously criticized consumer protection, rules against illicit money flows, and the way the law dealt with crypto activities by Trump and his family.

After the midterms, their negotiating position has also strengthened. The Democrats made big gains in Congress, reducing the likelihood that a Republican crypto plan can be adopted without major concessions. 

Especially around DeFi, a hard battle can arise. According to initial reports, some Democrats want decentralized platforms to comply with rules that normally apply to financial intermediaries.

It is important, however, that there is no final legislative text yet. The talks are at an early stage for the time being. But if the plans are actually worked out, the US crypto sector could again face a completely different regulatory framework.