Author: Miles Jennings, Chief Legal Counsel at a16z crypto
Compiled by: AIMan@Golden Finance
The House recently advanced an important new 'market structure' bill with overwhelming support (294 votes in favor, 134 votes against, including 78 Democrats supporting it).
This bill, known as the (Digital Asset Market Clarity Act) (HR 3633), will establish a clear regulatory framework for the digital asset market. The bill has now been submitted to the Senate for review, which is drafting its own version of market structure legislation and will reference the CLARITY Act.
If the bill is passed, it will establish clear rules for blockchain systems - ending years of uncertainty that stifled innovation, harmed consumer interests, and favored bad actors pursuing opacity over transparency rather than facilitating transparency. Just as the (Securities Act) established investor protection mechanisms in 1933 and propelled U.S. capital formation for nearly a century, the (CLARITY Act) could become a far-reaching piece of legislation.
When our legal framework can both promote innovation and protect consumers, the United States can lead the way, and the whole world can benefit. The CLARITY Act is just such an opportunity. This legislation builds on the bipartisan cooperation established by last year's FIT 21 bill, but the CLARITY Act improves upon it in several key areas, which we will outline below: covering what innovators need to know and why this bill is crucial for coordinating innovation, consumer protection, and U.S. national security.
With the recently signed (GENIUS Act) (details below), the need for a broader market structure bill has become more urgent.
Why the CLARITY Act is important
Although the cryptocurrency industry has existed for over a decade, the United States has yet to establish a comprehensive regulatory framework. However, cryptocurrency is no longer just a trend among tech insiders; it has become infrastructure: blockchain systems are now the foundation of payment systems (including through stablecoins), cloud infrastructure, digital marketplaces, and more.
But the construction of these protocols and applications lacks clear rules. What are the consequences? Legitimate entrepreneurs face regulatory shocks, while bad actors exploit legal ambiguities for profit. The passage of the CLARITY Act will reverse this situation.
By providing projects with transparent compliance pathways and ensuring regulators have more robust tools to regulate actual risks, the CLARITY Act (along with the stablecoin legislation known as the 'GENIUS Act') will help the already vast cryptocurrency industry emerge from the shadows and into the regulated economy. This new legislation creates a framework for responsible innovation, much like the foundational laws of the 20th century that helped public markets thrive and protect consumers.
In addition to providing a clear compliance pathway, the bill also offers clearer rules - giving entrepreneurs the legal certainty needed to innovate and operate domestically. This will ultimately alleviate the pressure on legitimate entrepreneurs to start businesses overseas (or to utilize inefficient and opaque structures to evade regulation).
This legal clarity will open the door to the next generation of decentralized infrastructure, financial instruments, and user-owned applications—all of which will be built in the United States. Ensuring that blockchain systems are developed in the U.S. will also protect global digital and financial infrastructure from reliance on systems created and controlled by, for instance, China, while ensuring that U.S. regulatory standards apply to the core financial infrastructure that an increasing number of people beyond cryptocurrency are using today.
What will the CLARITY Act do?
Establish a clear regulatory path for digital goods
(CLARITY Act) creates a regulatory framework for digital assets (referred to as 'digital goods') that grants users ownership of the blockchain system.
The bill's control-based maturity framework allows blockchain projects to issue digital goods and enter the public market without incurring excessive regulatory burdens or uncertainties.
Achieve oversight of blockchain-based intermediaries
The bill ensures that centralized participants in the cryptocurrency space (such as exchanges, brokers, and traders) are subject to strict regulation. These intermediaries include:
Need to register with the CFTC; and
Compliance with compliance standards similar to those for managing traditional financial institutions.
These requirements enhance the transparency of core market infrastructure, helping to prevent fraud and abuse and enhancing consumer trust. They also fill existing regulatory gaps—gaps that have allowed companies like FTX to operate without constraint in the U.S. market.
Protect consumers with strong safeguards while fostering innovation
(CLARITY Act) also establishes direct consumer protection measures, including:
Mandatory public disclosure obligations for digital goods issuers - ensuring retail investors can access basic, important information;
Limit insider trading - restricts the ability of early stakeholders to harm user interests by exploiting information asymmetries.
These measures also provide clearer roadmaps for entrepreneurs building decentralized blockchain systems, helping to foster innovation.
Which government agency is responsible for regulation?
(CLARITY Act) will provide a clear, structured pathway for the transition of digital assets from U.S. SEC regulation to the Commodity Futures Trading Commission (CFTC).
Let’s compare how current laws and the (CLARITY Act) (if passed) address the unique attributes of blockchain systems:
The above pathways are based on a carefully calibrated 'control-based' risk framework; details will follow.
How does the 'control-based' maturity framework of blockchain systems work?
Compared to the traditional effort-based decentralized tests created by the U.S. SEC in 2019 (which had an unclear definition of decentralization, allowing regulators to use that definition against good actors), CLARITY’s maturity framework employs clear, objective, and easily measurable standards.
These standards focus on who has control over the underlying blockchain system and its associated digital goods. This is more consistent with other regulatory regimes (such as money transmission) and eliminates negative incentives for builders to stop building to avoid being seen as centralized. More importantly, this approach will help legitimate builders thrive - and continue building (rather than being forced to abandon projects) - while making it harder for bad actors to exploit legal ambiguities, including by engaging in performative 'decentralization theatrics' (rather than true decentralization).
Specifically, the framework of the bill incentivizes decentralization and protects consumers in the following ways:
Impose more oversight and stricter regulatory burdens during the formation stage of blockchain systems - when there is centralized control, the risks associated with the native digital assets of that blockchain system are most similar to the risks of securities;
As projects mature, regulatory requirements will decrease - when there is no centralized control, risks are reduced and are most similar to the risks of commodities.
As with previous legislative efforts to regulate the transition from centralized to decentralized (see the comparison with FIT 21 below), the regulatory obligations applicable to projects within the 'maturity' range include:
Mandatory disclosure - this will enhance transparency; and
Sell restrictions for insiders - this can protect early consumers from harm by insiders (such as involved entrepreneurs and investors), as insiders may possess asymmetric information unknown to other consumers.
But unlike FIT 21, CLARITY establishes seven objective, measurable standards to determine when a specific blockchain system is no longer controlled by an individual or a collectively governed entity (such as a foundation), thus its native digital assets no longer pose risks similar to securities. By centering this approach on eliminating control, it can protect consumer investors while fully harnessing the potential of blockchain technology. Furthermore, because CLARITY adopts measurable (rather than amorphous) standards, it provides a framework that is easier for regulators to apply and for builders to follow.
In short, this new framework is a significant improvement over traditional regulatory frameworks, as securities laws were not designed for assets (like blockchain systems) whose risk profile can shift from resembling securities to resembling commodities.
This new framework has also received broad support from the industry.
What impact will it have on specific industries like DeFi?
(CLARITY Act) provides essential protections for decentralized finance (DeFi). Specifically, the bill:
Exempt DeFi protocols and applications from regulatory requirements for intermediaries in the trading of digital goods (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 legal clarity needed for DeFi projects:
Launching and selling their native tokens - these processes were previously fraught with risk and ambiguity;
Utilizing decentralized governance - avoiding the risk of being classified as centralized
Providing self-custody rights - many people have done this previously, but now through this bill, individuals will have 'self-custody rights.'
CLARITY creates a fair competitive environment for DeFi projects. This also paves the way for integrating the advantages of decentralized finance into the broader financial system, thereby unlocking its true potential more widely for the benefit of consumers.
However, the CLARITY Act is not without flaws. Since the bill focuses only on digital goods, it does not cover other regulated digital assets such as tokenized securities and derivatives. While the (CLARITY Act) exempts DeFi systems from complying with federal intermediary rules, it does not replace state-level regulation—meaning the DeFi industry remains vulnerable to inconsistent or excessive state policies. These gaps should be addressed by the Senate, future legislation, or through coordinated regulatory guidance (such as rulemaking by the SEC and CFTC).
Is CLARITY better than the status quo?
Yes; the (CLARITY Act) improves the status quo because...
… the industry currently lacks regulation. While some may argue that no regulation is better than having regulation, the current lack of transparency in regulation facilitates bad actors and bad actors who exploit this uncertainty to exploit consumers. (Not to mention that it can lead to unrestrained abuse of power by regulators.) FTX is a prime example of these issues, which not only harmed the entire industry but also harmed thousands of consumers. If we do not act now, we will open the door to more bad actors like the former CEO of FTX.
… the industry lacks transparency. Due to the lack of mandatory disclosure and listing standards, consumers often face risks of fraud and deception. This lack of transparency has fostered a 'casino' culture (rather than one focused more on innovation), leading to the emergence of purely speculative products like memecoins.
… the industry lacks protection. Due to the absence of clear boundaries on the regulatory authority of various federal agencies, blockchain projects (especially DeFi projects) remain vulnerable to the excessive regulation common during the previous administration.
… the industry lacks standards. Without standards in decentralization/control, consumers using blockchain systems face unknown risks. For example, they may believe their assets (including stablecoins) are secure - but if these blockchain systems are controlled by a single entity (which could shut it down directly), they may not be safe. As all industries mature, establishing standards becomes increasingly common.
(CLARITY Act) compared to previous legislative achievements, such as the (21st Century Financial Innovation and Technology Act) (also known as FIT 21), how does it fare? The CLARITY Act actually learns from the lessons of FIT 21 and improves upon it:
1. It improves transparency by plugging loopholes in FIT 21 and preventing certain legacy projects from evading disclosure. CLARITY provides a framework for legacy projects still in operation to fulfill their disclosure obligations.
2. It provides stronger consumer protections by making it more difficult for insiders to exploit information asymmetries. For example, CLARITY strictly limits insiders from selling assets before the project matures (i.e., while they still control the project).
3. Its maturity framework provides a more principled, control-based decentralization test, significantly improving the vague methods of FIT 21. This framework is also more precise because CLARITY presents seven objectively measurable standards to determine whether a blockchain system is mature.
4. It improves regulatory oversight and provides regulators with greater flexibility, which will help ensure the regulatory framework evolves and scales alongside the industry's maturation.
How does the CLARITY Act fit with the recently passed GENIUS Act?
The GENIUS Act represents a key step toward modernizing the financial system. The House passed this important legislation with overwhelming support (308 votes in favor, 122 votes against, including 102 Democrats supporting it), creating history. However, stablecoin legislation has greatly increased the need for broader market structure legislation like the CLARITY Act.
Why? Because GENIUS will accelerate the adoption of stablecoins, driving more financial activity onto the blockchain, thereby increasing reliance on blockchain and facilitating broader payments and business activities. This is already happening, as ubiquitous payment processors, traditional financial institutions, mature payment networks, and other entities are increasingly accepting and adopting stablecoins.
However, the current stablecoin legislation does not regulate the blockchain for stablecoin asset circulation - it does not require these tracks to be secure, decentralized, or transparently managed. This gap exposes consumers and the broader economy to new systemic risks.
With the GENIUS Act now signed into law, the demand for CLARITY has become more urgent.
The CLARITY Act provides the 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 mature blockchain systems also better assist entrepreneurs in understanding how to meet these standards.
Without the complementary protections of (GENIUS Act) and (CLARITY Act), the adoption of stablecoins may accelerate the use of unregulated, opaque, or even adversarial infrastructures. The passage of (CLARITY Act) will ensure stablecoins operate on secure networks, further protecting consumers, reducing financial risks, and consolidating the dollar's strong position and leadership in the next generation of financial systems.
What will happen next?
As the CLARITY Act has passed in the U.S. House of Representatives, the bill will be sent to the Senate. The Senate Banking Committee and Agriculture Committee may choose whether to take up the bill, amend it through their respective revision processes, and then submit it for a vote in the full Senate.
However, it is more likely that a group of bipartisan senators will introduce a separate Senate version of the cryptocurrency market structure bill that may be similar to the CLARITY Act in many respects. The Senate Banking Committee and the Agriculture Committee will then review the bill through their respective processes, and if approved, submit it for a vote in the Senate.
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—before each chamber votes on the final compromise version.
When might all this happen? The main leaders of both the House and Senate have set a goal to send the market structure bill to the President for signature by the end of September.
The CLARITY Act received 216 Republican votes and 78 Democratic votes, continuing the bipartisan momentum established by the FIT 21 bill (which passed the House with 71 Democratic votes). The bill has made comprehensive improvements over the FIT 21 bill - strengthening consumer protections, clarifying the standards for decentralization, and aligning more closely with existing regulatory frameworks.
The passage of the CLARITY Act will ensure that the United States continues to maintain its global leadership in blockchain infrastructure, benefiting developers and consumers. As a serious, thoughtful, and bipartisan attempt, the CLARITY Act aims to build an effective regulatory system for U.S. cryptocurrency that strikes a balance between innovation and regulation. It provides Congress with an opportunity to protect consumer rights while supporting infrastructure development in the digital economy, creating jobs and opportunities, marking the next significant milestone in the field of computational innovation—its importance is comparable to that of previous milestones like personal computers, cloud computing, and mobile computing.
We are at a critical moment.
