The Node Ahead: Seeking CLARITY - The long road to crypto's first real regulatory framework

Issue 116

For most of crypto’s existence, Congress largely remained on the sidelines while digital assets evolved from a niche technological experiment into a multi-trillion-dollar global asset class. In the absence of legislation specifically designed for blockchain networks, regulators were forced to apply financial laws written generations before the internet existed—primarily securities statutes from the 1930s and commodities laws from the mid-20th century.

That mismatch created one of the defining challenges of U.S. crypto regulation: digital assets do not fit neatly into traditional legal categories.

Some tokens clearly resemble securities because they are sold to raise capital or function as blockchain-based representations of stocks. Others operate more like commodities, payment systems, software infrastructure, or decentralized protocols with no obvious issuer at all. Because Congress never established a modern framework, regulators were left interpreting existing law in ways that often produced uncertainty and jurisdictional overlap. Businesses routinely struggled to determine whether a token would ultimately be treated as a security regulated by the SEC, a commodity overseen by the CFTC, or something else entirely.

Making matters worse, under former SEC Chair Gary Gensler, the federal government increasingly relied on enforcement actions rather than formal rulemaking to shape the industry. Numerous critics, myself included, argued that regulators were effectively creating policy through litigation without first establishing workable compliance standards. At the same time, the absence of clear rules also created opportunities for fraud and misconduct, culminating in several high-profile collapses that damaged public trust in the industry.

The uncertainty carried real economic consequences. Many crypto companies shifted talent, capital, and development activity overseas, while institutional participation remained constrained. Importantly, institutions were often not avoiding crypto because they rejected the technology itself. They were avoiding it because legal and compliance departments could not answer basic questions with confidence. In traditional finance, regulatory uncertainty increases compliance costs, expands liability exposure, and suppresses capital formation. Crypto proved no different.

That dynamic helps explain why the industry dramatically expanded its lobbying efforts in Washington over the past several years. Contrary to the caricature often presented by critics, much of the industry was never arguing against regulation itself. Many of the largest crypto companies, investors, and infrastructure providers have spent years asking Congress to establish clearer and more workable rules. Their argument was not that crypto should remain unregulated, but that blockchain networks should not be governed entirely through legal interpretations developed for paper stock certificates and centralized intermediaries.

That legislative vacuum has finally begun to close.

Over the last eighteen months, Washington’s posture toward crypto has shifted materially. Congress first moved on stablecoins through the GENIUS Act, establishing the first meaningful federal framework for dollar-backed digital assets. At the same time, both the SEC and the CFTC began moving away from the purely enforcement-driven posture that defined earlier years and toward greater use of rulemaking, guidance, and formal regulatory processes.

Most importantly, lawmakers from both parties increasingly converged around the idea that the United States needs a coherent market-structure framework defining when digital assets fall under SEC jurisdiction and when they should instead be treated as commodities regulated by the CFTC. The debate in Washington today is no longer whether crypto should be regulated. Increasingly, the debate is about what that regulatory framework should look like.

That effort has now culminated in the CLARITY Act.

The CLARITY Act represents the most comprehensive attempt yet to create a national regulatory framework for digital assets. Its central objective is deceptively simple: establish clear rules determining which regulator oversees which parts of the crypto ecosystem and under what standards. Beneath that seemingly narrow jurisdictional question lies a potentially transformative effort to integrate blockchain-based financial infrastructure into the legal architecture of American capital markets.

The House version of the legislation passed in July 2025 with substantial bipartisan support, clearing the chamber by a 294–134 vote that included support from 78 Democrats. More recently, the Senate Banking Committee advanced its own version of the bill by a bipartisan 15–9 vote—a milestone that many in Washington once considered politically impossible.

At the core of the legislation is a formal division of authority between the SEC and the CFTC based largely on decentralization. If a network remains meaningfully controlled by a centralized group whose managerial efforts drive the value of the asset, the project is more likely to fall under securities law and SEC oversight. If the network operates in a sufficiently decentralized manner without concentrated managerial control, the asset may qualify as a digital commodity overseen primarily by the CFTC.

Conceptually, that distinction sounds straightforward. In practice, however, implementing it has become one of the most consequential aspects of the bill.

The Senate version introduces a significantly more detailed decentralization framework than earlier drafts, evaluating factors such as validator concentration, governance authority, insider ownership, treasury control, protocol upgrade authority, sequencing control, and whether token holders continue to rely on a centralized managerial group. Importantly, lawmakers replaced earlier “common control” language with a broader “coordinated control” standard—a subtle but highly significant revision designed to prevent projects from avoiding securities oversight through legal formalities while remaining effectively controlled by insiders.

For years, one of the crypto industry’s largest unresolved questions has been whether decentralization is merely a marketing narrative or a legally measurable concept. CLARITY attempts to operationalize decentralization through measurable governance and control metrics, giving regulators a framework to evaluate factors such as validator concentration, governance authority, treasury control, and insider influence. Whether those standards ultimately prove clear enough in practice remains an open question, and regulators and courts will likely continue debating how they should be interpreted. Nevertheless, the legislation represents the most serious attempt yet to translate decentralization from an abstract idea into a legally relevant concept.

Beyond jurisdictional questions, the legislation establishes a comprehensive regulatory framework for crypto intermediaries, including exchanges, brokers, dealers, custodians, and trading platforms. These entities would face registration requirements, disclosure obligations, anti-fraud standards, segregation of customer assets, cybersecurity mandates, and stronger anti-money-laundering compliance requirements.

The bill also expands disclosure requirements for token issuers whose networks are not fully decentralized, requiring public reporting around governance structures, token supply, insider allocations, protocol risks, and material network changes. In many respects, the legislation moves large portions of the crypto industry closer to the transparency standards expected in traditional capital markets.

Another major component involves bankruptcy protections and custody segregation rules, heavily influenced by the failures of several large crypto platforms during the previous market cycle. The legislation attempts to clarify that customer assets should remain separate from corporate property during insolvency proceedings—one of the most glaring weaknesses exposed during prior exchange collapses.

Equally significant are protections for software developers, validators, node operators, oracle providers, sequencers, and other non-custodial infrastructure participants. That distinction between financial intermediaries and software infrastructure has become one of the defining philosophical debates in crypto regulation.

Increasingly, lawmakers appear to recognize that publishing open-source software is fundamentally different from operating a centralized financial institution. The bill therefore attempts to preserve room for decentralized infrastructure development while maintaining anti-money-laundering and Bank Secrecy Act obligations for centralized actors that actually custody customer assets or facilitate financial transactions.

Yet despite broad agreement on the need for regulatory clarity, the legislation nearly stalled over one surprisingly contentious issue: stablecoin yield.

For months, one of the biggest obstacles in Senate negotiations centered on whether stablecoin issuers should be allowed to share interest income generated from reserve assets with users. Stablecoin issuers today collectively earn billions of dollars annually by investing reserves into short-duration Treasury bills and other highly liquid instruments.

Crypto companies argued that customers supplying the capital backing those reserves should be allowed to participate in that yield. From the industry’s perspective, allowing stablecoin rewards was both economically rational and technologically consistent with blockchain-native finance.

Traditional banks viewed the proposal very differently.

The banking lobby feared that yield-bearing stablecoins could become direct competitors to savings accounts, potentially drawing deposits out of the traditional banking system. Banks earn substantial returns on customer deposits while often paying consumers relatively little in savings interest. If consumers could instead hold tokenized dollars outside the banking system while earning materially better returns, portions of the deposit base could gradually migrate toward crypto infrastructure—an understandably uncomfortable prospect for banks that would be forced to compete by offering customers a better product.

Over time, it became increasingly clear that the fight was not simply about financial stability, but about whether incumbents could preserve their privileged position in the architecture of money at the expense of the customers they claim to serve.

Eventually, negotiators reached a compromise. Under the Senate Banking Committee’s version of the bill, stablecoin issuers generally cannot pay passive interest solely for holding stablecoins. However, the legislation still permits certain forms of activity-based rewards tied to payments, transfers, network participation, or ecosystem usage. The final compromise effectively gave banks a prohibition against stablecoins functioning as direct savings-account substitutes while allowing crypto firms to preserve certain incentive mechanisms tied to blockchain activity.

Just as the technical disputes began resolving themselves, however, the politics became considerably more complicated.

Democratic resistance has increasingly shifted away from narrow regulatory concerns and toward conflict-of-interest questions surrounding Donald Trump’s involvement in crypto markets.

Trump-affiliated businesses have become increasingly active across multiple segments of the digital asset ecosystem, including NFTs, fundraising infrastructure, and stablecoin-linked ventures. That development has fundamentally altered the politics surrounding the bill, layering what might otherwise be a technical market-structure debate with a far more sensitive question of presidential financial interests.

Their argument is straightforward and, frankly, there is a legitimate concern here.

The Trump family’s crypto-related ventures have blurred the line between policy influence and private gain in ways that even many crypto industry participants view as uncomfortable. It is not unreasonable to argue that Congress should not be writing a favorable regulatory framework for an industry in which a sitting president and his family hold substantial financial interests without first implementing meaningful conflict-of-interest safeguards.

At the same time, this creates an unusually difficult strategic position for Democrats because the broader political landscape around crypto has shifted dramatically since the 2024 election cycle, when crypto-aligned super PACs and industry-funded political organizations demonstrated real electoral influence.

As a result, many Democrats now find themselves balancing two competing risks. Over-indexing on ethics concerns tied to Trump risks being portrayed as obstructionist at a moment when crypto is increasingly viewed as a legitimate extension of modern capital markets. Yet backing away entirely from those concerns carries its own political and substantive costs, particularly if it appears to endorse a regulatory framework that could allow a sitting president and his family to benefit from policy outcomes.

Ultimately, the Senate Banking Committee version advanced without the sweeping ethics restrictions some Democrats demanded. But the issue has not disappeared. It remains one of the largest risks as the legislation moves toward a full Senate vote because it threatens to fracture the bipartisan coalition that has finally emerged around crypto market-structure reform.

The legislative path forward is now relatively clear procedurally, even if politically difficult.

The legislation will eventually move to the Senate floor, where bipartisan support will likely be required to overcome procedural hurdles. If the Senate passes its version, lawmakers must still reconcile differences with the House bill before sending final legislation to President Trump.

The biggest immediate risk may simply be time. Congress has limited legislative runway before election politics and competing priorities begin consuming floor time. While momentum behind the bill is stronger than at any previous point, assembling a durable bipartisan coalition on the Senate floor is substantially harder than advancing legislation through committee.

Still, the probability of passage now appears materially higher than at any point in crypto’s history. The committee vote suggests the political center of gravity in Washington has shifted meaningfully toward establishing a formal crypto framework.

If the legislation ultimately becomes law, the implications would extend far beyond crypto trading itself. Together, the GENIUS Act and the CLARITY Act would establish the first comprehensive federal framework specifically designed for digital assets and blockchain-based financial infrastructure. GENIUS governs the money layer through stablecoin regulation. CLARITY governs the market-structure layer through jurisdictional rules, trading infrastructure standards, custody requirements, disclosure obligations, and digital commodity regulation.

While the combination of the two bills would not resolve every outstanding regulatory question, it would represent a historic shift in how the United States approaches digital assets. For the first time, Congress would be establishing a legal framework specifically designed for blockchain networks rather than forcing regulators and courts to adapt statutes written decades before the technology existed. Together, the GENIUS Act and CLARITY begin constructing the legal foundation for tokenized finance itself: stablecoin settlement rails, on-chain collateral systems, tokenized securities, blockchain-based market infrastructure, digital commodities markets, and decentralized financial networks operating within a recognized regulatory perimeter.

A workable framework would likely accelerate institutional experimentation with tokenized assets across traditional finance. Treasury markets, collateral management, private credit, fund administration, payments, repo markets, and settlement systems are all increasingly being explored through blockchain-based infrastructure. For Wall Street, CLARITY is not simply about legitimizing crypto trading. It is about reducing the legal uncertainty that has slowed large-scale deployment of blockchain-based financial products and services.

Even if CLARITY fails, the industry would likely continue benefiting from a more accommodative regulatory environment than it faced during the peak enforcement-heavy years. The SEC and CFTC have already begun moving toward greater use of rulemaking, guidance, and supervisory frameworks. Additional clarity would likely continue to emerge through agency actions.

The real issue is durability.

Rules created primarily through regulators can also be reversed by regulators. Guidance can be withdrawn. Enforcement priorities can change. Interpretations can shift with each administration. Markets may adapt to regulation, but they struggle to adapt to constant uncertainty about what the rules will be tomorrow.

That is ultimately why congressional legislation matters so much. The CLARITY Act would not simply create clearer rules; it would create more durable rules. For banks, asset managers, broker-dealers, custodians, pension funds, and public companies considering deeper involvement in digital assets, that durability may prove even more important than the specific provisions contained in the bill itself.

The long-term significance of CLARITY is not that it settles every regulatory question surrounding crypto. It is that, for the first time, Congress would formally begin integrating blockchain networks and digital assets into the legal architecture of American capital markets.

Disclaimer: This is not investment advice. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All Content is information of a general nature and does not address the circumstances of any particular individual or entity. Opinions expressed are solely my own.