Revised CLARITY Act targets non-decentralized DeFi operators
The revised CLARITY Act mandates US regulators to assess whether individuals or groups controlling ‘non-decentralized finance trading protocols’ must comply with securities, commodity, and anti-money laundering (AML) regulations. The legislation aims to bring clarity and investor protection amid the expanding decentralized finance (DeFi) ecosystem, while debates around ethics and stablecoin rules continue to unfold.
Definition and regulatory obligations for controllers
The revised legislation, published on Senator Cynthia Lummis’ website, defines a ‘non-decentralized finance trading protocol’ as one whose operation, rules, or functionality can be materially changed by a single individual or coordinated group. The definition includes protocols whose controllers can restrict user activity or whose transactions are not governed solely by transparent, pre-established code.
The bill proposes that the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) develop activity-based rules concerning registration, conduct, disclosure, recordkeeping, and supervision. The Treasury Department will determine how existing Bank Secrecy Act (BSA) obligations apply to these controllers.
Exemptions and technical clarifications
The act specifies that software and distributed ledger technology systems themselves would not be required to register as entities. Participation in incident-response or security councils will not inherently constitute control over a protocol.
This revised text was released ahead of a procedural Senate vote scheduled for September 15, requiring 60 votes to proceed. This threshold necessitates bipartisan support amid ongoing disagreements on ethics rules, anti-money laundering, and stablecoin yield structures.
Industry support and ongoing disputes
Ji Hun Kim, CEO of the Crypto Council for Innovation, described the upcoming Senate vote as a pivotal moment for digital assets, innovation, and American leadership. He emphasized the need for a regulatory framework that balances consumer protections with business conduct standards.
Coinbase CEO Brian Armstrong told CNBC that the CLARITY Act is prepared for a ‘yes’ vote, noting that the ‘must-have issues’ Coinbase identified were resolved, though negotiations over ethics provisions remain active and nearing resolution. However, the ethics section in the newly released text changed little and remains a key point of contention.
Democratic Senator Ruben Gallego cautioned against rushing the vote before disputes over ethics and stablecoin yields were settled. Armstrong indicated that, if the legislation fails to advance, the SEC and CFTC might resort to their existing regulatory authority to pursue rulemaking and innovation exemptions.
Why it matters
The revisions to the CLARITY Act aim to clarify regulatory responsibilities for DeFi protocols controlled by identifiable individuals or groups, addressing a critical gap in the regulation of emerging decentralized finance ecosystems. By targeting ‘non-decentralized’ systems, the act attempts to impose accountability and transparency in a rapidly evolving market with unresolved issues around the application of securities, commodities, and AML frameworks. Notably, the bill exempts software and distributed ledger technologies themselves from registration, thereby avoiding unnecessary barriers to innovation. At the same time, ongoing disagreements on ethics provisions and stablecoin yield regulation highlight the complexity of balancing innovation with investor protection. The Senate vote outcome will significantly influence the U.S. crypto industry's regulatory landscape and its future trajectory.
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