Understanding the CLARITY Act in one article: Why it matters to you

Original text: The CLARITY Act – Why it matters, what to know, and what to do (a16zcrypto)

By Miles Jennings and Aiden Slavin

Compiled by: Bibi News

Cover: Photo by Steven Abraham on Unsplash

The House of Representatives recently passed an important new “market structure” bill, the CLARITY Act, by an overwhelming majority (294 votes in favor, 134 against, with 78 Democrats in favor). This bill will establish a clear regulatory framework for the digital asset market. The bill is now before the Senate, which is developing its own version of market structure legislation and will refer to the CLARITY Act.

If passed, the CLARITY Act would establish clear rules for blockchain systems—ending years of uncertainty that stifled innovation, hurt consumers, and favored opaque profiteers over transparent entrepreneurs. The CLARITY Act could be as far-reaching as the Securities Act of 1933, which established investor protections and fueled a century of capital formation in the United States.

When our legal framework promotes innovation while protecting consumers, America leads the way and the world benefits. The CLARITY Act provides that opportunity. This legislation builds on last year’s bipartisan work on the FIT21 Act, but the CLARITY Act improves on it in several key ways, which we outline below: what innovators need to know, and why this bill is critical to reconciling innovation, consumer protection, and U.S. national security.

With the just-signed GENIUS Act, the need for a broader market structure bill has become even more pressing.

Why it matters

Although the cryptocurrency industry has been around for more than a decade, a comprehensive regulatory framework has yet to be established in the U.S. However, cryptocurrency is no longer just a trend among tech insiders, it has become infrastructure: blockchain systems now underlie payment systems (including through stablecoins), cloud infrastructure, digital marketplaces, and much more.

But these protocols and applications are built without clear rules. Legitimate entrepreneurs face regulatory pressures, while unscrupulous businesses take advantage of legal ambiguity to make profits. The passage of the CLARITY Act will reverse this situation.

By providing projects with a transparent path to compliance and ensuring regulators have better tools to police real risks, the CLARITY Act will bring the already massive cryptocurrency industry out of the shadows and into a regulated economy. This new legislation creates a framework for responsible innovation, just like the foundational laws that helped public markets thrive and protect consumers in the 20th century.

In addition to providing a clear path to compliance, the bill also provides clearer rules – giving entrepreneurs the legal certainty they need to confidently innovate and operate domestically. This will ultimately reduce the pressure on legitimate entrepreneurs to start businesses overseas (or circumvent regulations using inefficient and opaque structures).

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 U.S. Ensuring that blockchain systems are developed in the U.S. will also protect the global digital and financial infrastructure from becoming dependent on blockchain systems created and controlled by, for example, China, while also ensuring that U.S. regulatory standards apply to the core financial infrastructure that is increasingly being used by people outside of cryptocurrency.

What will this new legislation do?

Establishing a clear regulatory path for digital goods

The CLARITY Act creates a regulatory framework for digital assets (also known as “digital commodities”) that give users ownership rights on blockchain systems.

The bill’s controlled maturity framework allows blockchain projects to launch digital goods and enter the public market without undue regulatory burden or uncertainty.

Enable supervision of blockchain-based intermediaries

The bill ensures that centralized players in the cryptocurrency space, such as exchanges, brokers, and dealers, are strictly regulated. These intermediaries:

• Requires registration with the CFTC;
• Adhere to compliance standards similar to those governing traditional financial institutions.

These requirements increase transparency in core market infrastructure, help prevent fraud and abuse, and enhance consumer trust. They also close current regulatory gaps that have allowed companies like FTX to operate unfettered in the U.S. market.

Protect consumers with strong safeguards while promoting innovation

The CLARITY Act also establishes direct consumer protections, including:

• Mandatory public disclosure obligations for issuers of digital goods – ensuring that retail participants have access to basic, material information;
• Limit insider trading – limit the ability of early stakeholders to exploit information asymmetries to the detriment of users.

These measures also provide a clearer roadmap for entrepreneurs to build decentralized blockchain systems, helping to promote innovation.

Which government agency is responsible for regulation?

The CLARITY Act would provide a clear, structured pathway for the regulatory transition of 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) would address the unique properties of blockchain systems:

How does a “controls-based” maturity framework for blockchain systems work?

Compared to the traditional efforts-based decentralization test created by the U.S. Securities and Exchange Commission (SEC) in 2019, which has an unclear definition of decentralization that regulators can use against good actors, the CLARITY Act’s maturity framework uses 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 (e.g. money transmitters) and removes perverse incentives that encourage builders to stop building to avoid being seen as centralized. More importantly, this approach will help legitimate builders thrive — and continue to build (rather than being forced to abandon their projects); while making it more difficult for bad actors to exploit legal ambiguities, including by engaging in performative “decentralization drama” (rather than true decentralization).

Specifically, the bill’s framework incentivizes decentralization and protects consumers by:

• Imposing more oversight and stricter regulatory burdens during the formative stages of a blockchain system — when there is centralized control, the risks associated with the native digital assets of that blockchain system are most similar to those of securities;
• As projects mature, regulatory requirements decrease - when there is no centralized control, risk is reduced, most similar to the risk of commodities.

As with previous legislative efforts to regulate the transition from centralization to decentralization, regulatory obligations applicable to projects within the “maturity” range include:

• Mandatory disclosure – this will increase transparency;
• Sales restrictions on insiders – This protects early consumers from insiders (such as participating entrepreneurs and investors) who may have asymmetric information that other consumers are unaware of.

But unlike the FIT21 Act, the CLARITY Act establishes seven objective, measurable criteria for determining when a particular blockchain system is no longer controlled by an individual or a jointly managed group (such as a foundation) so that its native digital assets no longer pose securities-like risks. Because this approach is centered on eliminating control, it can protect consumer investors while realizing the full potential of blockchain technology. In addition, because the CLARITY Act uses measurable (rather than amorphous) criteria, it provides a framework that is easier for regulators to apply and builders to follow.

In short, this new framework is a significant improvement over the traditional regulatory framework, as securities laws are not designed for assets (such as blockchain systems) whose risk profile can change from being similar to securities to being similar to commodities. This new framework has also received widespread support from the industry.

How does this impact specific industries like DeFi?

The CLARITY Act provides important safeguards for decentralized finance (DeFi) . Specifically, the bill:

• Exempt DeFi protocols and applications from regulatory requirements for digital commodity trading intermediaries (such as exchanges and brokers);
• Setting standards for DeFi - To qualify, a DeFi system must not act as an intermediary, ensuring that a particular DeFi system does not reintroduce the risks that regulation is intended to mitigate.

Additionally, the bill will provide DeFi projects with needed legal clarity :

• Launching and selling your own native token — processes that were previously risky and unclear;
• Leverage decentralized governance — avoid the risk of being categorized as centralized
• Providing self-custody – Many people did this before, but now with this bill, individuals will have “self-custody”.

The CLARITY Act creates a level playing field for DeFi projects. It also paves the way for integrating the advantages of decentralized finance into the broader financial system, thereby unlocking its true potential more broadly and benefiting consumers.

However, the CLARITY Act is not perfect. Because the bill focuses only 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 federal intermediary rules, it does not replace state-level regulation - meaning that the DeFi industry remains vulnerable to inconsistent or overly regulatory 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 the CLARITY Act better than what’s already in place?

The answer is yes. The CLARITY Act improves the status quo because:

The industry is currently under-regulated. While some may argue that no regulation is better than some, the current lack of regulatory clarity creates opportunities for bad actors and profiteers to exploit consumers using this uncertainty. (Not to mention that it allows regulators to abuse their power unchecked.) FTX is a prime example of these issues, harming not only the industry as a whole, but thousands of consumers as well. If we don’t act now, we’ll open the door for more bad actors like the former FTX CEO.

Lack of transparency in the industry. Due to the lack of mandatory disclosure and listing standards, consumers are often at risk of scams and fraud. This lack of transparency fosters a "casino" culture (rather than a more innovative casino), resulting in the emergence of purely speculative products such as memecoin.

Lack of industry protection. Due to the lack of clear constraints on the regulatory authority of various federal agencies, blockchain projects (especially DeFi projects) remain vulnerable to excessive regulation that was common during the previous administration.

The industry lacks standards. Without standards for decentralization/control, consumers are exposed to unknown risks when using blockchain systems. For example, they may believe their assets (including stablecoins) are safe - but if these blockchain systems are controlled by a single entity (someone could just shut it down), they may not be safe. As all industries mature, setting standards is becoming more common.

How does the CLARITY Act compare to previous legislative efforts, such as the FIT21 Act? The CLARITY Act actually learns from the lessons of the FIT21 Act and improves upon them:

1. It improves transparency by closing loopholes in the FIT21 Act that have allowed some legacy projects to evade disclosure. The CLARITY Act provides a framework for implementing disclosure obligations for legacy projects that are still in operation.
2. It provides stronger consumer protections by making it more difficult for insiders to exploit information asymmetries. For example, the CLARITY Act severely restricts project 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 test of decentralization, significantly improving upon the vague approach of the FIT21 Act. The framework is also more precise, as the CLARITY Act proposes seven objectively measurable criteria to determine whether a blockchain system is mature.
4. It improves regulatory oversight and provides greater flexibility to regulators, which will help ensure that the regulatory framework evolves and scales as the industry matures.

How does the CLARITY Act fit in with the recently passed GENIUS Act?

The new GENIUS Act represents a critical step toward modernizing our financial system. The House made history by passing this important legislation in a landslide vote of 308-122, with 102 Democrats supporting it. However, this new legislation on stablecoins significantly increases the need for broader market structure legislation like the CLARITY Act.

Because the GENIUS Act will accelerate the adoption of stablecoins, it will drive more financial activities to migrate to the blockchain, thereby increasing reliance on the blockchain and enabling a wider range of payments and business activities. This is already happening as ubiquitous payment processors, traditional financial institutions, established payment networks, and others increasingly accept and adopt stablecoins.

But existing stablecoin legislation does not regulate the blockchains on which all these assets circulate—it does not require that these rails be secure, decentralized, or transparently managed. This gap exposes consumers and the economy as a whole to new systemic risks.

With the GENIUS Act now signed into law, the need for the CLARITY Act becomes even more urgent.

The CLARITY Act provides the necessary standards and oversight to ensure that the infrastructure supporting stablecoins (underlying blockchains, protocols, and other tools) meets security, transparency, and control standards. Its objective and measurable requirements for mature blockchain systems also better help entrepreneurs clarify how to meet these standards.

Without the complementary protections of the GENIUS Act and the CLARITY Act, the adoption of stablecoins could accelerate the use of unregulated, opaque, and even adversarial infrastructure. The passage of the CLARITY Act will ensure that stablecoins operate on a secure network, further protect consumers, reduce financial risks, and consolidate the dollar's strong position and leadership in the next generation of the financial system.

What happens next?

With the CLARITY Act having passed the U.S. House of Representatives, the bill will now move to the Senate. The Senate Banking and Agriculture Committees can choose to take up the bill, amend it through their respective amendment processes, and then send it to the full Senate for a vote.

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 ways. The Senate Banking and Agriculture Committees will then consider the bill through their respective procedures and, if approved, send it to the Senate for a vote.

If both chambers of Congress pass their own bills, the House and Senate will need to reconcile any differences — either through an informal negotiating process or a more formal consultative committee — and each chamber will then vote on a final compromise version.

When might this happen? Key leaders in the House and Senate have set a goal of sending a market structure bill to the president for his signature by the end of September.

Why is it relevant to you?

The CLARITY Act, which received 216 Republican votes and 78 Democratic votes, continues the bipartisan momentum established by FIT21, which passed the House with 71 Democratic votes. The bill improves on FIT21 by strengthening consumer protections, clarifying the standards for decentralization, and making it more consistent with existing regulatory models.

Passage of the CLARITY Act will ensure that the United States remains a global leader in blockchain infrastructure, benefiting developers and consumers alike. The CLARITY Act is a serious, thoughtful, and bipartisan attempt to create an effective regulatory system for cryptocurrency in the United States that strikes a balance between innovation and regulation. It provides Congress with an opportunity to protect consumer rights while supporting the infrastructure of the digital economy, creating jobs and opportunities, the next major milestone in computing innovation—as important as personal computers, cloud computing, and mobile computing before them.

This is not just about cryptocurrency, it’s about ensuring the future of the internet is democratic, open, and secure for everyone.

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