The CLARITY Act: A Revolution in Finance

Few pieces of legislation have the potential to fundamentally reshape an entire financial ecosystem; the CLARITY Act is one of them. By establishing a regulatory framework for digital assets, it aims to bring order and, as the name suggests, clarity to a space long defined by uncertainty – much as the Glass-Steagall Act sought to stabilize the American banking system during the Great Depression.

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While the CLARITY Act remains pending, the legislative landscape continues to evolve, and the details discussed here may change. Nonetheless, should the Senate move forward with market structure legislation it would be a pivotal piece of financial reform. Therefore, it is worth looking at what the CLARITY Act may do for digital assets. 

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The Regulatory Landscape

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At its core, the CLARITY Act is a response to a fundamental question that regulators have struggled to answer: what are digital assets? The IRS defines them broadly as electronically held holdings that can be “bought, sold, owned, transferred, or traded.” In practice, they function as substitutes for traditional currency recorded on decentralized, cryptographically secured databases known as blockchains. These digital assets encompass a wide category ranging from cryptocurrencies and stablecoins, to non-fungible tokens (NFTs).

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The absence of a clear regulatory framework has had real consequences. For years, digital assets have existed in a regulatory grey area subjected to “regulation by enforcement” as the SEC and CFTC have competed for jurisdiction. Under this patchwork approach, the SEC has treated most digital assets as securities under the 1946 Howey test , while the CFTC has classified many of the same digital assets as commodities. The CLARITY Act seeks to end this discrepancy by updating the nearly century-old law and clearly defining the roles of both agencies.  

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What Does The CLARITY Act Actually Do? 

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The current draft of CLARITY has three major components: 1) it lays out new definitions for the digital asset market, 2) it grants new roles to the SEC and CFTC, and 3) it introduces new regulations for market intermediaries. Each component addresses a unique grey area of current regulations: 

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• Setting Definitions: The CLARITY Act splits digital assets into three categories. Digital Commodities are assets whose value is intrinsically linked to a blockchain – the broadest and most foundational category. Investment Contract Assets (ICAs) are digital commodities sold in the context of raising capital, such as in an initial offering. This designation is temporary, and once an ICA is traded on a secondary market, it reverts to being a digital commodity. Permitted Payment Stablecoins (PPS) are digital assets designed for payments and settlement, denominated in a national currency, and issued by entities subject to state or federal oversight. Notably, the recent bipartisan agreement mandates that stablecoins cannot provide yields or anything approximating interest. The bill also introduces the concept of a Mature Blockchain — one not controlled by any single person or group. Most blockchains start out fairly centralized, controlled and operated by the company that created them. Over time, as more participants join and the network grows, that control can become so diffuse that no single entity meaningfully governs it anymore. Bitcoin is the clearest example — no single person, company, or government controls it. That's what the bill means by "mature" and is essentially a way of codifying when a digital asset graduates from SEC oversight into the broader, more permissive CFTC framework.

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• The Role of the CFTC and SEC: The CLARITY Act draws a clearer boundary between the CTFC and SEC. The CFTC gains jurisdiction over digital commodity transactions, with the authority to regulate digital commodity exchanges (DCEs) and enforce anti-fraud and anti-manipulation rules. DCEs must register with the CFTC and adhere to core principles around trade monitoring, conflict of interest, and recordkeeping.  The SEC, meanwhile, takes jurisdiction over ICAs and their issuers, and retains anti-fraud powers over digital commodities involved in transactions with SEC-registered entities. The SEC will also be responsible for writing rules regarding Blockchains that are unable to “mature.” Additional legislation under consideration would potentially require some PPS issuers to obtain bank charters and fall under additional banking oversight by the Federal Reserve and the Office of the Comptroller of the Currency (OCC).

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• Regulation of Intermediaries: The bill splits intermediary regulation between the CTFC and SEC, directing them to collaborate on broker-dealers and alternative trading systems (ATS). The SEC will oversee national securities exchanges, ATS, and broker-dealers operating in the digital asset space. The CFTC, meanwhile, will regulate broker-dealers that fall outside SEC oversight, requiring them to keep customer funds separate, maintain appropriate custodianship, and register with a futures association.

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A Final View

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The CLARITY Act still has a way to go before becoming law, but a recent bipartisan deal struck by Senators Alsobrooks (D-MD) and Tillis (R-NC) has meaningfully revived its prospects. The stakes are real: without a coherent regulatory framework, digital assets will continue to occupy a regulatory grey zone that stifles innovation and makes it difficult for investors and everyday users to understand their tax obligations.

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The European Union (EU) fully implemented a comprehensive digital asset framework in 2024.  The Markets in Crypto-Assets (MiCA) Regulations created a single rulebook across all EU member states for crypto assets and service providers that focuses on disclosure and transparency, licensing of exchanges and custodians, and consumer protection and market integrity.  While it may not be perfect, MiCA has provided structure for future growth and innovation in the EU.

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The CLARITY Act has the potential to move the United States forward and beyond the “grey zone.” By establishing clear regulatory guidance, it represents an important step forward that could give investors and everyday users more confidence to participate in digital asset markets while also making it easier to understand and meet tax obligations. Whether it will get that chance remains to be seen.

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