Original title: The CLARITY Act – Why it matters, what to know, and what to do. Original author: Miles Jennings, a16z crypto
Original translation by: AIMan, Golden Finance
The House recently advanced an important new 'market structure' bill with an overwhelming majority (294 votes in favor, 134 against, including 78 Democrats supporting).
The bill, named the (Digital Asset Market Clarity Act) (abbreviated as '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, where the Senate is drafting its own version of market structure legislation, referencing the CLARITY Act.
If this act is passed, it will establish clear rules for blockchain systems—ending years of uncertainty that stifled innovation, harmed consumer interests, and favored unscrupulous merchants practicing opacity over entrepreneurs pursuing transparency. Just as the 1933 (Securities Act) established investor protection mechanisms and propelled U.S. capital formation for nearly a century, the (CLARITY Act) could become a law of profound impact.
When our legal framework can both promote innovation and protect consumers, the U.S. can lead the way, benefiting the entire world. The CLARITY Act is that opportunity. This legislation builds on the bipartisan collaboration established by last year's FIT21 Act, 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 act is crucial for coordinating innovation, consumer protection, and U.S. national security.
With the recently signed (GENIUS Act) (details to follow), the need for a broader market structure act has become more urgent.
Why is the CLARITY Act important?
Despite the cryptocurrency industry being around for over a decade, the U.S. 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 foundational in various areas including payment systems (including via stablecoins), cloud infrastructure, digital markets, and more.
But the construction of these protocols and applications lacks clear rules. What is the result? Legitimate entrepreneurs face regulatory backlash, while unscrupulous merchants profit from legal ambiguity. The passage of the CLARITY Act will reverse this situation.
By providing projects with a transparent compliance pathway and ensuring regulators have better tools to oversee actual risks, the CLARITY Act (and the stablecoin legislation known as the 'GENIUS Act') will bring the already substantial cryptocurrency industry out of the shadows and into a regulated economic framework. 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 act also establishes clearer rules—granting entrepreneurs the legal certainty needed to innovate confidently 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 for the next generation of decentralized infrastructures, financial instruments, 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 infrastructures from reliance on blockchain systems created and controlled by entities such as China, while also ensuring that U.S. regulatory standards apply to the core financial infrastructure increasingly used by those beyond the existing cryptocurrency space.
What will the CLARITY Act do?
Establishing a clear regulatory pathway for digital commodities
(CLARITY Act) creates a regulatory framework for digital assets (referred to as 'digital commodities'), granting users ownership of blockchain systems.
The act’s control-based maturity framework allows blockchain projects to launch digital commodities and enter public markets without facing excessive regulatory burdens or uncertainties.
Implement oversight of blockchain-based intermediaries
The act ensures that centralized participants in the cryptocurrency space (such as exchanges, brokers, and dealers) are subject to strict regulation. These intermediaries include:
Must register with the CFTC; and comply with compliance standards similar to those governing traditional financial institutions.
These requirements enhance the transparency of core market infrastructures, help prevent fraud and abuse, and bolster consumer trust. They also address existing regulatory gaps—gaps that allowed companies like FTX to operate unrestrained in the U.S. market.
Protecting consumers with strong safeguards while promoting innovation
(The CLARITY Act) also establishes direct consumer protection measures, including:
Mandatory public disclosure obligations for digital commodity issuers—ensuring that retail investors have access to essential, important information;
Restrict insider trading—limiting the ability of early stakeholders to harm user interests by exploiting information asymmetries.
These measures also provide entrepreneurs with a clearer roadmap for building decentralized blockchain systems, helping to foster innovation.
Which government agency is responsible for oversight?
(The CLARITY Act) will provide a clear, structured path for the transition of digital assets from U.S. SEC oversight to the Commodity Futures Trading Commission (CFTC).
Let’s compare how existing laws and (the CLARITY Act) (if passed) address the unique properties of blockchain systems:
The above approach is based on a carefully calibrated 'control-based' risk framework; details to follow.
How does the control-based maturity framework of blockchain systems work?
Compared to the traditional decentralized test based on efforts created by the U.S. SEC in 2019 (which had an unclear definition of decentralization that regulators could exploit against good actors), CLARITY's maturity framework adopts clear, objective, and easily measurable standards.
These standards focus on who has control over the underlying blockchain system and its associated digital commodities. This aligns more closely with other regulatory regimes (such as money transmission) and removes negative incentives that discourage builders from 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 more difficult for bad actors to exploit legal ambiguities, including through participation in performative 'decentralized theatrics' (rather than true decentralization).
Specifically, the framework of this act incentivizes decentralization and protects consumers in the following ways:
Imposing more oversight and stricter regulatory burdens during the formative stages of blockchain systems—when centralized control exists, 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 become more similar to those of commodities.
Similar to previous legislative efforts aimed at regulating the transition from centralized to decentralized (see below for comparisons with FIT21), the regulatory obligations applicable to projects within the 'maturity' range include:
Mandatory disclosure—this will enhance transparency; and
Restrictions on insider sales—this can protect early consumers from harm inflicted by insiders (such as participating entrepreneurs and investors) since insiders may hold asymmetric information unknown to other consumers.
But unlike FIT21, CLARITY establishes seven objective, measurable standards for determining when a specific blockchain system is no longer under the control of individuals or a jointly managed group (like a foundation), thus its native digital assets no longer pose securities-like risks. Because this approach centers on removing control, it can fully leverage the potential of blockchain technology while protecting consumer investors. Additionally, 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 are not designed for assets (like blockchain systems) due to the risk profiles of assets potentially shifting from resembling securities to resembling commodities.
This new framework has also received broad support from the industry.
What impact will this have on specific industries like DeFi?
(The CLARITY Act) provides important safeguards for decentralized finance (DeFi). Specifically, the act:
Exempting DeFi protocols and applications from regulatory requirements applicable to digital commodity trading intermediaries (such as exchanges and brokers);
Setting 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 alleviate.
Additionally, the act will provide the legal clarity needed for DeFi projects:
Launching and selling their own native tokens—these processes were previously fraught with risks and ambiguities;
Utilizing decentralized governance—avoiding the risk of being classified as centralized.
Providing self-custody rights—many people have done this before, but now through this act, individuals will have 'self-custody rights.'
CLARITY builds 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 consumers.
However, the CLARITY Act is not without its flaws. Since the act only focuses on digital commodities, it does not cover other regulated digital assets, such as tokenized securities and derivatives. Although (the CLARITY Act) exempts DeFi systems from complying with federal intermediary rules, it does not replace state-level regulation—meaning the DeFi industry remains susceptible to inconsistent or overly burdensome 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 current situation?
Yes; (The CLARITY Act) improves the current situation because...
...the industry currently lacks regulation. While some may argue that no regulation is better than regulation, the current lack of transparency in regulation facilitates wrongdoing and unscrupulous merchants who exploit this uncertainty to take advantage of consumers. (Let alone that this can lead to regulatory bodies abusing their power unchecked.) FTX is a prime example of these issues, which not only harmed the entire industry but also thousands of consumers. If we do not act now, we will open the door to more wrongdoers like the former CEO of FTX.
...the industry lacks transparency. Due to the absence of mandatory disclosure and listing standards, consumers often face risks of scams and fraud. This lack of transparency has fostered a culture of 'casinos' (rather than a focus on innovation), leading to the emergence of purely speculative products like memecoins.
...the industry lacks protection. Due to the lack of clear constraints on the regulatory authority of various federal agencies, blockchain projects (particularly DeFi projects) remain vulnerable to excessive regulation commonly seen during past administrations.
...the industry lacks standards. Without standards on decentralization/control, consumers face unknown risks when using blockchain systems. 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 secure. As all industries mature, establishing standards becomes more common.
How does the (CLARITY Act) compare to previous legislative achievements, such as the (21st Century Financial Innovation and Technology Act) (also known as FIT21)? The CLARITY Act actually learns from the experiences of FIT21 and improves upon it:
1. It improves transparency by closing loopholes in FIT21, preventing certain legacy projects from evading disclosure. CLARITY provides a framework for legacy projects that are still operational to fulfill their disclosure obligations.
2. It provides stronger consumer protection by making it more difficult for insiders to exploit information asymmetries. For example, CLARITY strictly limits the ability of insiders to sell assets before the project matures (i.e., while they still control the project).
3. Its maturity framework provides a more principled, control-based decentralized test that significantly improves upon the ambiguous approach of FIT21. The framework is also more precise, as CLARITY proposes seven objectively measurable standards to assess the maturity of blockchain systems.
4. It enhances regulatory oversight and provides regulators with greater flexibility, which will help ensure that the regulatory framework evolves and scales as the industry matures.
How does the CLARITY Act align with the recently passed GENIUS Act?
The GENIUS Act represents a key step towards modernizing the financial system. The House passed this important legislation with an overwhelming majority (308 votes in favor, 122 against, including 102 Democrats supporting), making history. However, the legislation on stablecoins has greatly increased the need for broader market structure legislation like the CLARITY Act.
Why? Because GENIUS will accelerate the adoption of stablecoins, pushing more financial activity onto the blockchain, thereby increasing reliance on blockchain and enabling broader payments and commercial activity. This is already happening, as ubiquitous payment processors, traditional financial institutions, established payment networks, and other entities increasingly accept and adopt 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 entire 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 necessary standards and oversight to ensure that the infrastructure supporting stablecoins (underlying blockchains, protocols, and other tools) meets safety, transparency, and control standards. Its objective and measurable requirements for mature blockchain systems also better assist entrepreneurs in clarifying how to meet these standards.
Without the complementary protections of the (GENIUS Act) and (CLARITY Act), the adoption of stablecoins could accelerate the use of unregulated, opaque, and even adversarial infrastructures. The passage of the (CLARITY Act) will ensure that stablecoins operate on secure networks, further protecting consumers, reducing financial risks, and solidifying the dollar's strong position and leadership in the next generation of financial systems.
What happens next?
As the CLARITY Act passes in the U.S. House of Representatives, it will be sent to the Senate. The Senate Banking Committee and Agriculture Committee may choose whether to take up the bill, revise it through their respective amendment processes, and then submit it for a vote in the full Senate.
However, it is more likely that a bipartisan group of senators will introduce a separate Senate version of the cryptocurrency market structure bill, which may be similar to the CLARITY Act in many respects. The Senate Banking Committee and Agriculture Committee will then review the bill through their respective procedures, and if approved, will submit it for a Senate vote.
If both houses of Congress pass their respective bills, the House and Senate will need to reconcile any differences—either through informal negotiation processes or more formal conference committees—before each house votes on the final compromise version.
When might all this be realized? The major leaders in the House and Senate have set a goal of sending 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 FIT21 Act (which passed in the House with 71 Democratic votes). The act represents a comprehensive improvement over the FIT21 Act—strengthening consumer protections, clarifying standards for decentralization, and aligning more closely with existing regulatory frameworks.
The passage of the CLARITY Act will ensure that the U.S. continues to maintain a global leadership position in blockchain infrastructure, benefiting developers and consumers alike. As a serious, thoughtful, and bipartisan effort, the CLARITY Act aims to establish an effective regulatory framework for U.S. cryptocurrency that strikes a balance between innovation and regulation. It presents Congress with an opportunity to protect consumer rights while supporting the infrastructure development of the digital economy, creating jobs and opportunities, marking the next significant milestone in the field of computational innovation—its importance is on par with that of previous innovations in personal computing, cloud computing, and mobile computing.
We are at a critical moment.
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