Ryan Chan-Wei
On May 14, the Senate Banking Committee voted 15 to 9 to advance the Digital Asset Market Clarity Act (CLARITY Act), with two Democrats crossing party lines to join all thirteen Republicans. The vote marks a turning point: after years of regulation by enforcement and a chronic lack of regulatory clarity, Congress is finally on the cusp of setting clear rules of the road. This is meaningful progress. But it is also deeply imperfect.
The text that emerged from the Committee vote is the most substantive piece of digital asset legislation Congress has produced thus far, and yet two of its provisions threaten to undermine the success that the bill aspires to deliver. This post examines the transformative potential of the bill and argues that these flaws should be addressed before final consideration on the Senate floor.
What the Bill Gets Right
The CLARITY Act delivers on its central promise by replacing years of regulatory uncertainty with a clearer statutory rulebook. This clarity is a sea change for issuers, intermediaries, and investors who have operated at the mercy of enforcement actions for far too long.
Among other things, the bill draws cleaner jurisdictional lines between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). Title I’s ancillary asset framework sets the boundary between SEC and CFTC jurisdiction over digital assets, and Section 902 establishes a formal memorandum of understanding to coordinate supervision and enforcement across the two agencies. Section 301’s non-decentralized protocol test acknowledges that decentralized governance is not itself a “person” or “coordinated group” and excludes “core infrastructure” such as validators and nodes from the “control” analysis. This matters because permissionless networks are open systems, and treating their underlying technical infrastructure as regulated financial intermediaries would impose surveillance burdens on software developers and node operators who never touch user funds. That kind of treatment would likely chill innovation and push legitimate technical activity offshore. Additionally, Section 605, the Keep Your Coins Act, codifies the right to self-custody, which is the digital analog of holding your own property rather than entrusting it to a third party. As we have argued before, such statutory protection is crucial for preserving financial privacy and must not be taken for granted.
The bill also contains provisions that are particularly conducive to innovation. For example, Section 604, the Blockchain Regulatory Certainty Act, protects non-controlling developers and infrastructure providers from being classified as money transmitters. The provision has drawn pushback from law enforcement groups, who argue that it would create loopholes for criminals to exploit. However, it is important to understand that Section 604 narrows regulatory classification, not criminal liability. Anyone who intentionally facilitates the transfer of illicit funds remains subject to prosecution under existing criminal law. Money transmitter classification was designed for custodial intermediaries that hold and transmit customer funds, not for developers who write code. As then-Acting Assistant Attorney General Matthew Galeotti put it, “merely writing code, without ill-intent, is not a crime.” The right tool for catching criminals is the criminal law, not a regulatory regime built for providers of payment services.
Furthermore, Section 505 confirms that tokenized securities remain securities subject to SEC authority. This prevents regulatory arbitrage, while still permitting tokenization to proceed within an established framework. Section 501 establishes a CFTC-SEC micro-innovation sandbox that allows firms to test novel products under regulatory oversight for a period of up to two years. The optimal design of regulatory sandboxes remains the subject of ongoing research, but the underlying approach is a step in the right direction. It recognizes that excessive regulation can be stifling, and that responsible innovation requires room for experimentation without being immediately saddled by the full weight of compliance obligations.
Overall, the provisions in the CLARITY Act provide a credible foundation for setting clear rules for digital assets. However, the Act suffers from fundamental flaws that need to be addressed if it is to live up to its potential.
Erosion of Financial Privacy
Title III is perhaps the most problematic aspect of the bill, as it contains provisions that cumulatively represent one of the largest expansions of financial surveillance in recent memory. Section 303 extends Section 311 PATRIOT Act-style “special measures” authority to digital assets. Enacted in 2001, Section 311 lets the Treasury Department designate foreign jurisdictions, institutions, or transaction types as “primary money laundering concerns,” triggering heightened requirements on U.S. financial institutions that range from enhanced recordkeeping to outright transaction prohibitions. Section 303 brings the same regime to digital asset transactions.
More concerning still is Section 305’s new “temporary hold” authority. It creates a safe harbor for stablecoin issuers and digital asset service providers who voluntarily freeze suspicious transactions, including in response to written requests from law enforcement. An intermediary that freezes a customer’s funds in good faith is shielded from private lawsuits under Section 305’s safe harbor. The customer not only lacks any meaningful opportunity to challenge the freeze in court before it occurs, but may not even receive notice at all if law enforcement agencies seek to withhold such notification. In the context of law enforcement, a warrant is generally considered the constitutional floor for seizing property under the Fourth Amendment, while the right to due process is enshrined in the Fifth Amendment. Section 305 represents a substantial encroachment on both constitutional protections and should therefore raise alarm bells.
Ultimately, the real danger is that Title III is yet another step in the slow, inexorable march toward the continued erosion of Americans’ financial privacy. The Bank Secrecy Act began as a narrow statute in 1970, but five decades of expansion have produced a reporting regime that captures over 27 million reports annually with little to show for it in actual enforcement outcomes. Title III continues that trajectory.
Restricting Stablecoin Rewards Would Be a Mistake
The bill’s other significant flaw lies in Section 404, the prohibition on stablecoin rewards paid by intermediaries. The GENIUS Act, enacted in July 2025, prohibits permitted payment stablecoin issuers from paying “any form of interest or yield” to holders “solely in connection with the holding, use, or retention” of the stablecoin. That language reaches issuers and the pass-through structures widely identified as the obvious form of evasion. However, Section 404 of the CLARITY Act goes substantially further. It applies to all “covered digital asset service providers and their affiliates,” a category that captures centralized intermediaries such as exchanges, brokers, and dealers. And it prohibits both direct interest on passive holdings and anything “economically or functionally equivalent” to interest.
The tougher position on stablecoin rewards in the CLARITY Act was itself the product of challenging negotiations quarterbacked by Senators Tillis and Alsobrooks. Despite this, banks are still not satisfied and are pressing for more, to the point of making it virtually impossible for stablecoin issuers and intermediaries to offer any kind of economic incentive to prospective customers. This stricter prohibition is asking too much. The GENIUS Act position was already a compromise to begin with, carefully calibrated through extensive deliberation to strike a sensible balance. To go further would unravel that balance entirely.
Banks and stablecoin players are not competing on an equal footing. Banks have a substantial head start, as they have accumulated structural advantages over decades that stablecoin issuers and intermediaries lack. The competitive dynamics are closer to a college football team facing an NFL team than to a contest between peers.
With that football analogy in mind, consider what banks are asking Congress to do. Banks can offer prospective customers a wide variety of incentives to attract their business, ranging from interest payments on deposits to cash back on credit card payments. But they want Congress to prevent stablecoin issuers and intermediaries from offering analogous rewards for stablecoins. The NFL team, in other words, is attempting to ban its college opponents from using the forward pass while continuing to throw the football freely. This is not fair competition but a bid to entrench a double standard that would compound banks’ incumbent advantage. Banks have survived similar competition in the past, such as from money market mutual funds, and will do so again. The Senate should strike Section 404 and preserve the status quo ante established by the original GENIUS Act framework.
Detractors might contend that there is a need to limit the competitive threat that stablecoins pose to banks because they are more lightly regulated and unfairly benefit from reduced compliance burdens. It is true that banks are subject to a byzantine regulatory framework that is in dire need of reform and that they face more cumbersome regulatory requirements than stablecoin players. However, that is a function of the fact that banks engage in a broader and more complex set of activities that includes lending, wealth management, and a range of other financial intermediation services.
If we conduct a like-for-like comparison of the area in which bank deposits compete with stablecoins, namely their function as payment instruments backed by a legal claim on an issuing entity, it becomes clear that the opposite is in fact true. The asset-liability mix underpinning stablecoins regulated under the GENIUS Act is markedly stricter than the comparable requirements for deposits in a fractional reserve banking system. Such stablecoins can only be collateralized by a limited scope of high-quality liquid assets (e.g., short-term government debt securities), whereas bank deposits are permitted to be deployed for the purposes of credit, maturity, and liquidity transformation that has made the business of banking so lucrative.
Furthermore, even if, for the sake of argument, we accept the incorrect premise that stablecoin players are less stringently regulated than banks, the proper policy response should not be to enmesh stablecoins in the same labyrinthine web that banks are currently stuck in. Exporting the flaws of the banking regulatory framework to stablecoins would be akin to building a new house on a broken foundation. A new dawn for digital assets is on the horizon, and stablecoins are poised to continue growing in importance as the settlement backbone of the crypto ecosystem. To that end, Congress must safeguard the freedom to innovate and allow stablecoins to thrive.
Conclusion
The CLARITY Act represents a significant milestone as it finally gives the digital asset industry more clarity about how the regulatory perimeter is defined. Some regulation, particularly regulation that draws clear lines, indeed beats no regulation. It provides much needed certainty to enable investment and innovation. However, the lines also need to be drawn in the right places, as exemplified by the flawed provisions identified above. Fixing Title III and Section 404 would bolster the vibrancy and dynamism of the digital asset ecosystem for years to come, and the Senate should seize the opportunity to do so. The road to CLARITY has been long. The finish line is in sight, but there is still much ground to cover.
