President Joe Biden has slapped fresh sanctions on Cuban police for suppressing the unrest, and warned of additional punitive measures if the communist regime does not address the protesters' demands for sweeping change.
In recent months the Cuban government has accelerated reforms to modernize the economy and staunch the worst economic crisis the island nation has experienced in 30 years. In part driven by US sanctions, the downtown and chronic shortages of food, electricity and medicine have been exacerbated by stringent measures against Covid-19.
In February, the government decided to open up much of the controlled economy to the fledgling private sector, except for key areas such as health, media and education. Around 2,000 activities were made available to self-employed workers.
Roughly 600,000 Cubans are estimated to be working in the private sector, about 13 per cent of the workforce. But these so-called "cuentapropistas" have called for a legal structure that would explicitly permit their businesses.
Friday's green light for small and medium enterprises was given during a session of the State Council, which president Miguel Díaz-Canel joined via video conference.
"The State Council approves the decree 'On Micro, Small and Medium Enterprises' which allows for their coherent insertion into the economy to be part of the productive transformation of the country," a note posted to the National Assembly's website said.
In June, prime minister Manuel Marrero Cruz warned that the expansion of permitted private activities would not be allowed to go too far "as there are limits that cannot be exceeded".
But Oniel Díaz, a consultant specializing in Cuba's business development, said the new SMEs law still represents a turning point that many Cubans have been eagerly anticipating for years.
"For the Cuban economy... this represents a giant step that will have consequences in the medium and long term" for the reconfiguration of the national economy, he told AFP.