With the signing of the (GENIUS Act) into law, our need for the (CLARITY Act) has become increasingly urgent.
Written by: Miles Jennings, Head of Policy and General Counsel at a16z crypto
Compiled by: Luffy, Foresight News
The U.S. House of Representatives recently advanced an important new 'market structure' bill with overwhelming bipartisan support (294 votes in favor, 134 against, with 78 Democrats supporting). This bill, known as the (Digital Asset Market CLARITY Act) (House Bill 3633), will establish a clear regulatory framework for the digital asset market. The bill is now in the Senate review stage, where the Senate is developing its own version of market structure legislation, with the (CLARITY Act) serving as a reference.
If passed, this bill will establish clear 'rules of the game' for blockchain systems, putting an end to years of stifling innovation, harming consumer interests, and favoring shady businesses that adhere to opaque principles over entrepreneurs who pursue transparency. Just as the 1933 (Securities Act) established investor protection mechanisms and propelled a century of capital formation in the U.S., the (CLARITY Act) is poised to become a law of historical significance.
When our legal framework can both promote innovation and protect consumers, the U.S. can lead the way, and the whole world can benefit from it. The (CLARITY Act) presents such an opportunity. Although this legislation builds on the bipartisan cooperation of last year's (21st Century Financial Innovation and Technology Act) (FIT21), it has improved in several key areas, which will be elaborated below: what entrepreneurs need to know and why this bill is crucial for coordinating innovation, consumer protection, and U.S. national security.
Combined with the recently signed (GENIUS Act) (which will be detailed below), the demand for broader market structure legislation has become increasingly urgent.
Why it matters: A macro perspective
Despite the crypto industry having developed for over a decade, the U.S. has yet to establish a comprehensive regulatory framework. However, cryptocurrencies have become more than just a trend within the tech circle; they have become infrastructure: blockchain systems are now foundational to many fields such as payment systems (including through stablecoins), cloud infrastructure, digital markets, and more.
However, these protocols and applications have been built in the absence of clear rules. What has been the result? Legitimate entrepreneurs face regulatory unpredictability, while speculators exploit legal ambiguities for profit. The (CLARITY Act) will reverse this situation.
By providing projects with a transparent compliance path and ensuring that regulatory agencies have more effective tools to regulate actual risks, the (CLARITY Act) (along with the newly named (GENIUS Act) stablecoin bill) will bring the already large crypto industry out of the shadows and into a regulated economy. The new legislation will create a framework for responsible innovation, akin to the foundational laws of the 20th century that helped public markets flourish and protected consumers.
In addition to providing a clear compliance path, the bill establishes clearer rules that grant entrepreneurs legal certainty, allowing them to innovate confidently and operate domestically. This will ultimately alleviate the pressure on legitimate entrepreneurs to move their businesses overseas.
This legal clarity will open the door to the next generation of decentralized infrastructure, financial tools, and user-owned applications, all of which will be built in the U.S. Ensuring that blockchain systems are developed in the U.S. will also protect global digital and financial infrastructure from being reliant on, for example, blockchain systems created and controlled by China, while ensuring that U.S. regulatory standards apply to the core financial infrastructure now used by those outside the crypto space.
What role will this new legislation play?
Creating a clear regulatory path for digital goods
The (CLARITY Act) creates a regulatory framework for digital assets that grant users ownership within blockchain systems.
The bill's 'Control-Based' maturity framework allows blockchain projects to launch digital goods and enter the public market without bearing excessive regulatory burdens or facing uncertainty.
Achieve oversight of blockchain-based intermediaries
The bill ensures that centralized entities in the crypto space (such as exchanges, brokers, and dealers) are subject to strict oversight. These intermediaries must:
Registering with the Commodity Futures Trading Commission (CFTC);
Complying with compliance standards similar to those of traditional financial institutions.
These requirements enhance the transparency of core market infrastructure, helping to prevent fraud and abuse, and boosting consumer trust. They will also fill current regulatory gaps — previously, companies like FTX could operate in the U.S. market without restraints.
Providing strong safeguards for consumers while promoting innovation
The (CLARITY Act) also includes direct consumer protection measures, including:
Requiring digital goods issuers to fulfill mandatory public disclosure obligations to ensure retail participants can access basic, important information;
Restrict insider trading and limit the actions of early stakeholders who exploit information asymmetry to harm user interests.
These measures also provide entrepreneurs with a clearer roadmap for building decentralized blockchain systems, helping to foster innovation.
Which government agency is responsible for regulation?
The (CLARITY Act) will provide a clear and structured path for the transition of regulatory authority over digital assets from the U.S. Securities and Exchange Commission (SEC) to the Commodity Futures Trading Commission (CFTC).
Let's compare how current law and the (CLARITY Act) (if passed) address the unique attributes of blockchain systems:
How does the 'Control-Based' Maturity Framework for blockchain systems work?
Unlike the traditional control-based decentralized tests established by the SEC in 2019, the maturity framework of the (CLARITY Act) employs clear, objective, and easily measurable criteria.
These standards focus on who controls the underlying blockchain systems and their associated digital goods. This is more consistent with other regulatory frameworks (like money transmission), eliminating improper incentives that cause developers to stop development for fear of being seen as centralized. More importantly, this approach will help legitimate developers grow and continue developing (rather than abandoning projects) while making it harder for bad actors to exploit legal ambiguities, including engaging in 'performative decentralization' (rather than actual decentralization).
Specifically, the bill's framework incentivizes decentralization and protects consumers in the following ways:
Imposing more oversight and stringent regulatory burdens during the formation phase of blockchain systems (when centralized control exists) as the risk of the native digital assets of blockchain systems is most similar to securities;
As projects mature (with no centralized control, reduced risks, and becoming more similar to commodities), reducing regulatory requirements.
As with previous legislative efforts to transition 'from centralized to decentralized' (compared to the differences with FIT21 below), regulatory obligations for projects within the 'maturity' range include:
Mandatory disclosure: will increase transparency;
Sales restrictions on insiders: protecting consumers in early stages and preventing insiders (such as relevant entrepreneurs and investors) from profiting from asymmetric information unknown to other consumers.
Unlike FIT21, the (CLARITY Act) lists seven objective, measurable criteria to determine when a specific blockchain system is no longer controlled by individuals or a collectively managed group (such as a foundation), thereby making its native digital assets no longer pose a risk similar to securities. This approach, which is centered on eliminating control, protects consumer investors and unlocks the full potential of blockchain technology. Furthermore, by adopting measurable criteria, the framework provided by the (CLARITY Act) is easier for regulatory agencies to apply and for developers to follow.
In short, this new framework is a significant improvement over traditional regulatory frameworks because securities laws are not designed for assets like blockchain systems, whose risk characteristics may shift from resembling securities to resembling commodities. This new framework has also garnered broad support from the industry.
What impact does this have on specific industries like DeFi?
The (CLARITY Act) provides important safeguards for DeFi. Specifically, the bill:
Exempting DeFi protocols and applications from the regulatory requirements established by the bill for digital goods trading intermediaries (such as exchanges and brokers);
Establish standards for DeFi. To qualify, DeFi systems must not act as intermediaries, ensuring that specific DeFi systems do not reintroduce the risks that regulation aims to mitigate.
Additionally, the bill will provide the necessary legal clarity for DeFi projects to be able to:
Launching and selling their own native tokens, which previously had high risks and unclear processes;
Adopting decentralized governance without fear of being classified as centralized;
Providing self-custody services, which many projects have previously done, and now through this bill, individuals will have 'self-custody rights'.
The (CLARITY Act) creates a level playing field for DeFi projects. This also paves the way for integrating the advantages of DeFi into the broader financial system, unleashing its true potential for a wider consumer base.
However, the (CLARITY Act) is not perfect. It only focuses on digital goods and does not address other regulated digital assets such as tokenized securities and derivatives. Moreover, while the (CLARITY Act) exempts DeFi systems from federal intermediary rules, it does not preempt state regulation, meaning the DeFi industry remains vulnerable to inconsistent state policies or overreach. These gaps should be addressed in the Senate, future legislation, or through coordinated regulatory guidance (such as rulemaking by the SEC and CFTC).
Is the (CLARITY Act) better than the current system?
Yes; the (CLARITY Act) improves the status quo for the following reasons:
The industry currently lacks regulation: some may argue that no regulation is better than regulation, but the current regulatory ambiguity benefits bad actors and speculators who exploit uncertainty to harm consumers (not to mention the unchecked abuse of power by regulatory agencies). FTX is a typical example of these issues, which not only harmed the entire industry but also affected thousands of consumers. If we do not act promptly, we risk opening the door to more bad actors like the former CEO of FTX.
The industry lacks transparency: without mandatory disclosure and listing standards, consumers frequently face scams and fraud. This lack of transparency fosters a 'casino' culture, giving rise to purely speculative products like Meme coins.
The industry lacks protection: there is a lack of clear constraints on the regulatory authority of various federal agencies, and blockchain projects (especially DeFi projects) still face the risk of overregulation, which has been common in previous administrations.
The industry lacks standards: there are no standards surrounding decentralization/control, leading consumers to face unknown risks when using blockchain systems. For example, they may assume their assets (including stablecoins) are secure. But if these blockchain systems are controlled by a single entity (who could directly shut it down), the assets may not be secure. As all industries mature, establishing standards will become increasingly common.
How does the (CLARITY Act) compare to previous legislative efforts (such as FIT21)?
The (CLARITY Act) actually incorporates the lessons learned from FIT21 and improves upon them:
Enhancing Transparency: Filling the gaps in FIT21 (which may allow certain traditional projects to evade disclosure requirements). The (CLARITY Act) provides a framework for disclosure obligations for still active traditional projects.
Strengthening Consumer Protection: Making it harder for insiders to profit from information asymmetry. For example, the (CLARITY Act) strictly limits insiders from selling assets before the project matures (i.e., while still controlling the project).
More Reasonable Maturity Framework: Adopting a control-based decentralized testing significantly improves the vague approach of FIT21. This framework is also more precise, as the (CLARITY Act) proposes seven objective and measurable criteria to determine whether a blockchain system is mature.
Improving Regulatory Oversight: Providing greater flexibility to regulatory agencies, helping ensure that the regulatory framework evolves and expands as the industry matures.
How does the (CLARITY Act) relate to the recently passed (GENIUS Act)?
The newly passed (GENIUS Act) is a key step in modernizing the financial system. The House passed this significant legislation with overwhelming bipartisan support (308 votes in favor, 122 against, with 102 Democrats supporting), creating history. However, this new legislation regarding stablecoins greatly increases the demand for broader market structure legislation such as the (CLARITY Act).
Why? Because the (GENIUS Act) will accelerate the adoption of stablecoins, driving more financial activities onto the blockchain, increasing reliance on blockchain for widespread payments and commercial activities. This trend is already occurring as ubiquitous payment processors, traditional financial institutions, mature payment networks, and others increasingly accept and adopt stablecoins.
However, current stablecoin legislation does not regulate the blockchains that all these assets rely on, nor does it require these 'channels' to be secure, decentralized, or transparently governed. This gap exposes consumers and the broader economy to new systemic risks.
With the signing of the (GENIUS Act) into law, the need for the (CLARITY Act) has become increasingly urgent.
The (CLARITY Act) provides necessary standards and oversight to ensure that the infrastructure supporting stablecoins (underlying blockchain, protocols, and other tools) meets safety, transparency, and control standards. Its objective, measurable requirements for defining mature blockchain systems also clarify how entrepreneurs can meet these standards.
Without these complementary protections, the adoption of stablecoins may accelerate the use of unregulated, opaque, or even hostile infrastructures. By ensuring that stablecoins operate on secure networks through the (CLARITY Act), further consumer protection, reduced financial risk, and solidification of the dollar's strong position and leadership in the next-generation financial system will be achieved.
What happens next?
As the (CLARITY Act) passes in the U.S. House of Representatives, the bill will be sent to the Senate. The Senate Banking and Agriculture Committees may review the bill.
Amend through their respective revision processes and then submit to the full Senate for a vote.
However, it is more likely that a group of bipartisan senators will propose a separate Senate version of the cryptocurrency market structure bill, which may resemble the CLARITY Act in many aspects. Subsequently, the Senate Banking and Agriculture Committees will review the bill through their own procedures, and if approved, it will be sent to the full Senate for a vote.
If both chambers of Congress pass their respective bills, the House and Senate will need to reconcile any differences, whether through informal negotiation processes or more formal conference committees, and then each chamber will vote on the final compromise version.
When might all this be realized? The major leaders of the House and Senate have set a goal to send the market structure bill to the president for signing by the end of September.
