Regulatory Agencies Move to Fill the Void Left by the Clarity Act

U.S. regulatory agencies are swiftly working to replace the failed Clarity Act with new measures, but uncertainty remains about their long-term effectiveness.

News Analysis Regulatory Agencies Move to Fill the Void Left by the Clarity Act

U.S. regulatory bodies are quickly working to introduce new regulations in the absence of the Clarity Act, but will these measures be effective long-term?

By Jesse Hamilton|Edited by Nikhilesh De1 hour ago5 min readMake preferred on ShareShare this articleCopy linkX (Twitter)LinkedIn Facebook Email Make preferred on Chairman Paul Atkins' U.S. Securities and Exchange Commission is now striving to compensate for the Senate's failed crypto Clarity Act. (Jesse Hamilton/CoinDesk)SummaryShow

U.S. market regulators are swiftly attempting to address the gap left by the Clarity Act's failure, but the actions from the Securities and Exchange Commission and Commodity Futures Trading Commission may not fully suffice.
SEC Chairman Paul Atkins has repeatedly expressed that his agency required legal backing for its operations, which it did not receive.

The Clarity Act is no longer valid (at least for the time being). Many in the crypto community viewed this as a significant setback. Yet, how many truly understood the implications of the legislation?

The Digital Asset Market Clarity Act was yet another attempt by Congress to clarify the regulatory landscape surrounding cryptocurrencies, aiming to delineate various types of cryptocurrencies and specify which regulatory bodies would oversee them.

Throughout much of the crypto industry's existence in the U.S., there has been contention with agencies like the U.S. Securities and Exchange Commission regarding the permissible activities of platforms such as Coinbase and Kraken, and whether the issuance of crypto should be treated like that of securities. This has resulted in numerous enforcement actions, costly settlements, and considerable drama, particularly involving former SEC Chair Gary Gensler, who has received his share of criticism from crypto advocates.

The Clarity Act intended to resolve these issues while also granting the Commodity Futures Trading Commission greater authority, especially concerning the regulation of crypto commodity spot markets. Since Bitcoin BTC$81,808.72 and Ethereum's ether ETH$2,649.04 were classified as commodities, it became evident that the majority of crypto trading occurs in a sector lacking direct regulatory oversight, except in instances of market manipulation.

This regulatory conflict is distinctively American, as the U.S. has developed separate agencies for securities and derivatives, unlike many other countries where these functions are unified. This separation complicates asset classification and regulation.

A key element of the Clarity Act was to categorize different blockchain-native assets and designate their regulatory bodies. Additionally, the bill included measures aimed at combating illicit financial activities and proposed limited legal protections for software developers in decentralized finance (DeFi) to shield them from liability for how their creations are utilized.

Rather than delve into the provisions that ultimately doomed the bill, which were largely unrelated to its main objectives, let’s discuss what the landscape looks like without the Clarity Act. Fortunately, the SEC has not left the industry in limbo for long.

Following the demise of Clarity, the SEC has not completely abandoned the industry. The agency is now led by a chairman appointed by pro-crypto President Donald Trump, and SEC Chairman Paul Atkins has prioritized establishing regulations for digital assets. With the Clarity Act's failure, he feels a renewed obligation to create a framework that can replace it.

Just two days post-Clarity's collapse, Atkins launched a significant policy initiative to create a regulatory framework for tokenizing securities, a key focus of the SEC's new crypto strategy. However, this is just one aspect of his broader agenda.

Atkins and CFTC Chairman Mike Selig, who previously worked on crypto issues at the SEC, initiated a collaborative effort on digital asset regulation, starting with a set of definitions outlining how various assets would be treated, known as a "taxonomy." These staff-level policy initiatives have offered some clarity to the industry, though their stability is questionable as they could be easily overturned by future leadership changes at the agencies.

Atkins has also set in motion several formal initiatives:

The SEC proposed its first significant rule on crypto last month, aimed at establishing Regulation Crypto Assets — guidelines for fundraising in crypto offerings without triggering regulatory scrutiny.
Recently, the SEC suggested a critical rule allowing blockchain data to function as an official ownership record.
The agency is also close to finalizing a rule on how investment advisers should manage custody of digital assets.

As noted by Capital Alpha policy analyst Ian Katz, the SEC and CFTC are now positioned to "accelerate with aggressive, pro-industry proposals."

He commented, "The Republican leadership at these agencies can advance regulations without needing Democratic support," following the Clarity Act's failure. "Some of these proposals may implicitly convey to Democrats: This is what you get when you don’t legislate."

The SEC's formal crypto regulations, led by an all-Republican commission that currently has two Democratic vacancies, would require significant effort to reverse under a new administration (specifically, one appointed by a future Democratic president), although they are not as durable as statutory law. The latest initiative regarding tokenization is intended as a preliminary step that could inform future, more permanent policies — or even a renewed attempt at the Clarity Act, according to Atkins.

Similarly, the CFTC, which is smaller than the SEC, has also seized the opportunity presented by the gap left by Clarity to advance its crypto regulatory framework. Chairman Mike Selig has sent a proposal regarding crypto transactions and markets to the White House for review as of Friday.

Currently, Selig is the sole member of a five-member commission, allowing him to act independently. He has already begun drafting rules for prediction markets, a closely related area to crypto, while continuing to work on crypto regulations. Recently, he also approved the first regulated crypto perpetual futures, or "perps."

Selig has indicated that his team is working towards establishing a "crypto asset market" designation for firms similar to the CFTC's existing category of designated contract markets (DCMs).

Therefore, both the SEC and CFTC are pursuing multiple projects to create a fragmented version of what the Clarity Act would have provided. However, these efforts may lack the stability the industry seeks and could face legal challenges due to their absence of statutory backing, potentially delaying progress if judicial review becomes necessary.

In summary, Atkins has repeatedly highlighted the need for the Clarity Act. As he stated in August, "Legislation is crucial for enacting durable rules that protect our current work from being undone by a future rogue regulator."

The term "rogue" may be subjective, but despite Atkins' determination to push forward with existing SEC authorities, he continues to express concerns about the necessity of Congressional action. "Indispensable," he has referred to the need for legislation.

In earlier speeches, he has made similar statements about the importance of future-proof regulations, asserting, "Only Congress can future-proof regulation in this space."

However, he has also stated that his agency can support legislative efforts.

"My vision aligns with legislation under consideration by Congress and aims to complement, not replace, their essential work," he remarked upon launching his Project Crypto in November. Yet, for now, the project stands alone.

Regulation Clarity ActRelated AssetsBitcoin$81,808.721.24%Ethereum$2,649.042.06%Latest Crypto News

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