The highly anticipated Digital Asset Market Clarity Act, or CLARITY, has taken a significant step forward, signaling a potential turning point for the cryptocurrency industry in the United States. With the US Senate Banking Committee releasing the full 278-page draft on January 13, the legislative landscape for digital assets appears poised for a comprehensive overhaul. This proposed bill abandons the piecemeal approach of designating tokens as securities or commodities on an individual basis, opting instead for an innovative “lane system” that assigns regulatory jurisdiction based on an asset's functional lifecycle.
Senate Banking Committee Chairman Tim Scott emphasized the urgency and importance of this legislation, stating,
“This legislation gives everyday Americans the protections and certainty they deserve. Investors and innovators can’t wait forever while Washington stands still, and bad actors exploit the system. This legislation puts Main Street first, cracks down on criminals and foreign adversaries, and keeps the future of finance here in the United States.”
The timing of the CLARITY Act could not be more critical for an industry navigating ongoing regulatory uncertainties. Matt Hougan, Chief Investment Officer at Bitwise, likened the legislation to the “Punxsutawney Phil of this crypto winter,” suggesting that its passage could propel the market to unprecedented all time highs. This sentiment is echoed in prediction markets, where Polymarket users currently assign an optimistic 80% chance of the CLARITY Act becoming law this year. However, the clock is ticking, with senators having a tight 48-hour window to propose amendments to the comprehensive text.
Bridging the Regulatory Divide: SEC vs. CFTC
At the core of the CLARITY Act is its attempt to forge a legislative connection between the two primary US market regulators: the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). The bill revives and codifies a long standing legal debate: that tokens initially sold with a promoter's promise might resemble securities but can evolve into commodity like network assets as control decentralizes. To operationalize this, the draft introduces the concept of an “ancillary asset.”
An ancillary asset is defined as a network token whose value relies on the “entrepreneurial or managerial efforts” of an originator or a “related person.” The legislation directs the SEC to establish detailed rules for applying these concepts, effectively granting the agency front end oversight of new crypto projects. Once a token enters this lane, the bill mandates an extensive, public company like disclosure regime led by the SEC. This includes:
- Reviewed or audited financial statements, dependent on the size of the capital raise.
- Detailed ownership records and related party transactions.
- Information on token distributions and code audits.
- Comprehensive tokenomics data.
- Market data such as average prices, highs, and lows.
Crucially, the bill establishes a clear handoff to the CFTC by repeatedly linking the definition of a “digital commodity” to the Commodity Exchange Act. The CFTC is positioned as the relevant regulator for market plumbing, requiring the SEC to notify its sister agency of certain certifications. In essence, the SEC focuses on “promoter” related issues such as disclosure, anti fraud measures, and fundraising, while the CFTC oversees trading venues and intermediaries once assets are traded as commodities. This framework also extends existing investor protection rules, ensuring that Regulation Best Interest applies to broker dealer recommendations involving digital commodities, and investment advisers' fiduciary duties encompass advice on these assets. This prevents brokers from having a regulatory free pass, even for assets like Bitcoin and Ethereum classified as commodities, ensuring suitability and preventing conflicts of interest for retail investors.
ETF Fast Pass and Staking Clarity
For holders of major digital assets, one of the most immediate and impactful provisions is a specific carve out for exchange traded products (ETPs). The draft specifies that a network token is not an ancillary asset if its unit has been the principal asset of an ETP listed on a registered national securities exchange as of January 1, 2026. This serves as a functional on ramp to commodity status, potentially circumventing years of litigation and SEC debate over decentralization. In practice, this “ETF gatekeeping” clause would apply to Bitcoin and Ethereum due to their established ETP presence, extending similar treatment to other digital assets like XRP, Solana, Litecoin, Hedera, Dogecoin, and Chainlink that achieve this status.
Beyond asset classification, the CLARITY Act offers significant relief for the Ethereum ecosystem concerning staking. The bill addresses the long standing concern that staking rewards could be classified as securities income by defining them as “gratuitous distributions.” This definition explicitly covers multiple staking pathways, including self staking, self custodial staking with a third party, and even liquid staking structures. This is particularly noteworthy given past SEC enforcement actions against firms like Kraken for their staking activities. Crucially, the text presumes that a gratuitous distribution is not, by itself, an offer or sale of a security. The language specifically notes that “self custodial with a third party” applies where the third party operator does not maintain custody or control of the staked token, creating a tailored safe lane for non custodial and liquid staking designs, while leaving custodial exchange staking open to continued regulatory scrutiny.
Stablecoin Yield and DeFi Safe Harbors
The legislation directly addresses the “stablecoin rewards fight” within its market structure package. Section 404 appears to grant the banking sector a victory by prohibiting companies from paying interest or yield solely for holding a payment stablecoin. However, legal experts highlight a critical distinction: the bill deliberately allows stablecoins to be used to earn yield, but it draws a clear legal line between “the stablecoin” itself and “the yield product.” The bill adopts the definition of a “payment stablecoin” from the GENIUS Act, requiring such coins to be fully backed, redeemable at par, and used for settlement, without entitling holders to interest or profits from the issuer. This prevents a token like USDC from paying yield merely for being held, which could classify it as an illegal security or shadow banking product.
Yet, Title IV includes a section on “preserving rewards for stablecoin holders.” This provision allows users to earn yield by utilizing stablecoins in other systems, such as DeFi lending protocols, on chain money markets, or custodial interest accounts. Under this framework, the stablecoin remains a payment instrument, while the “wrapper” or the yield generating product becomes the regulated financial entity, whether as a security, commodity pool, or banking product. This architecture effectively prevents regulators from classifying a stablecoin as a security simply because it can be used to earn interest, thus preserving the viability of the DeFi yield economy built atop “boring” payment tokens.
The new draft also tackles the contentious issue of decentralized finance (DeFi) interfaces. Moving beyond a simple “wallets versus websites” debate, the bill establishes a “control test” to determine regulatory obligations. A web interface is legally treated as mere software, and thus exempt from broker dealer registration, if it does not hold user funds, control private keys, or have the authority to block or reorder transactions. This creates a statutory safe harbor for non custodial platforms like Uniswap, 1inch, and MetaMask’s swap UI, classifying them as software publishers rather than financial intermediaries. Conversely, the bill strictly regulates any operator that possesses control. If a website can move funds without a user signature, batch trades, or route orders through proprietary liquidity, it is classified as a broker or exchange. This captures centralized entities like Coinbase and Binance, as well as custodial bridges and CeFi yield platforms.
Pending Issues and Criticisms Remain
Despite the prevailing optimism, the bill’s release has initiated a “mad scramble” among legal experts to identify potential flaws before the swift 48-hour amendment window closes. Jake Chervinsky, Chief Legal Officer at Variant Fund, noted that lobbyists and policy experts are racing to address what he described as “many” critical issues before the markup deadline.
“A lot has changed since the draft that came out in September, and the devil is in the details. Amendments are due by 5 pm ET, so it's a mad scramble today identifying critical issues to fix in markup. Sadly there are many,” Chervinsky commented.
Some critics also argue that the bill introduces existential threats to privacy and decentralization. Aaron Day, an independent Senate candidate, controversially described the mandatory trade surveillance requirements as taking a page from the “NSA playbook.” Day highlighted provisions for “universal registration” that would require exchanges, brokers, and even “associated persons” to register, effectively undermining the concept of anonymous participation. He also pointed to mandates for “government custodians,” arguing that self custody for regulated activity would effectively become illegal.
“BlackRock and Wall Street get clear on ramps while DeFi gets strangled in the crib. The SEC and CFTC get expanded empires and fresh revenue streams. You get watched. Tracked. Controlled,” Day asserted.
Beyond privacy concerns, reports indicate the industry faces two specific policy hurdles in the latest draft. Crypto journalist Sander Lutz reported that the language around stablecoin yield has left both banks and crypto advocates dissatisfied. While banks appear to have secured a ban on interest for simply holding stablecoins, loopholes regarding “activity rewards” and loyalty programs remain murky. Lutz also noted that the Senate Banking Committee's unexpected addition of a section on DeFi caught industry lobbyists off guard, with new definitions potentially roping decentralized protocols into strict regulatory frameworks. As the Senate Banking Committee moves toward the CLARITY Act markup, the political landscape remains fluid, with ongoing debates and potential amendments shaping its final form.
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