The Long, Winding, and Rocky Road Toward Crypto Clarity

Introduction

At its inception, the Senate version of the Clarity Act was a relatively straightforward piece of legislation, though not particularly simplified, weighing in at around 275 pages. After about a year of tortured negotiations, including significant last-minute amendments, a 635-page bill emerged that is far broader, far more burdensome, and far more complex than was originally envisioned. Unfortunately, from a public policy standpoint, the latest version of the Clarity Act has failed to advance to the Senate floor, thus dashing any hope for a comprehensive crypto market structure bill to advance in the United States for some time—per Senator Lummis (R-WY), probably until at least 2030. That said, the last-minute efforts to reach a compromise were instructive of where the sensitive issues are and will remain as the digital asset and blockchain industry moves forward.

Key Highlights

• No one answer for the Act's failure. The Clarity Act fell short for a combination of reasons, all of which have policy implications, which must eventually be resolved.
• Regulators are filling the gap. Despite the absence of legislation, financial services regulators are stepping into the gap in order to fill out a rulebook for digital assets and blockchain in the context of financial services.
• The absence of legislation will likely have unintended effects. The failure of the Clarity Act may have unintended and potentially adverse circumstances for smaller players in financial services.
• The absence of legislation will not hinder continued forward movement. Crypto as a whole is moving forward at a rapid pace with new product developments and compliance improvements.

Where the Clarity Act Broke Down

From the beginning, four major issues occupied the center of the debate over the Clarity Act.

First was the concern expressed by the banking industry, particularly community banks, that the GENIUS Act, which provides a statutory framework for issuance and redemption of payment stablecoins, allowed loopholes that enabled payment stablecoins to offer yield and/or rewards, which were far more competitive than typical bank deposit yields, and therefore likely to cause deposit flight. This, the argument proceeds, would constrict commercial lending activity, leading to a shrinkage of bank balance sheets with particularly damaging effects on smaller communities. The negotiators eventually crafted a compromise provision in which passive yield for payment stablecoins would not be allowed, but if the stablecoin generated activity or transaction-based rewards, then yields or rewards would be allowed, subject to rulemaking. That, however, was not sufficient relief for the banking industry, which continued to insist on a complete ban on digital asset yields. These objections were addressed in the September 14 draft of the Clarity Act through an innovative "circuit breaker" provision to protect against deposit flight, which would have allowed the Treasury secretary to intervene by writing rules restricting rewards available to payment stablecoin holders if the Treasury secretary determined in writing that substantial deposit flight is occurring from community banks. If that determination is made, the Treasury Department would be directed to write rules restricting yields or rewards that could be made available to payment stablecoin holders. The debate between the banking and crypto industry has centered on whether the data suggests that such a deposit flight actually would happen. The "circuit breaker" provision addressed that concern by vesting the responsibility in the Treasury secretary to be attentive to any data suggesting substantial deposit flight and then do something about it. Ironically, the absence of such a provision means that stablecoin yield/reward products are likely to proliferate.

Second, from the beginning many senators insisted on stricter protections regarding anti-money laundering and consumer protection. The latest bill had explicitly preserved the Securities and Exchange Commission's (SEC) anti-fraud and market manipulation authority as well as state consumer protection remedies. The Agriculture Committee added best execution, rulemaking, whistleblower protections, certified annual financial statements, and restrictions on exchanges using their own digital commodities to satisfy capital requirements. Because the Commodity Futures Trading Commission (CFTC) was set to be the primary crypto regulator should the Clarity Act have been enacted, an additional $150 million was authorized for that agency. Law enforcement changes also included digital commodities, brokers, dealers, and exchanges into the Bank Secrecy Act (BSA) and Office of Foreign Assets Control (OFAC) compliance, expanded Treasury authority over foreign digital asset transactions tied to major money laundering concerns, and allowed temporary holds on suspicious transactions without civil liability in specified circumstances. The Agriculture Committee also authorized $150 million for the Financial Crimes Enforcement Network (FinCEN) to expand its anti-money laundering capacity. Many of these additions to the draft resulted over time in growing support (or at least neutrality) from law enforcement groups for passage of the Clarity Act. Those budgetary additions are now dead letters and the requirements for disclosure, best execution, and the like will now be left up to market participants with limited (if any) ability to establish a regulatory examination regime.

Third, Clarity Act drafters and negotiators wrestled with how best to regulate decentralized finance (DeFi) in a way that would provide effective oversight but not stifle innovation. The industry has long supported the Blockchain Regulatory Certainty Act (BCRA) but the latest draft removed language that could have extended BCRA's DeFi protections more directly into criminal money transmission cases. The final draft included protections preventing software developers from being treated as money transmitters or being covered under the BSA merely for developing software, but it removed references to 18 U.S.C. § 1960, the federal statute prohibiting unlicensed money transmitting businesses, thus leaving the application of the statutory prohibition to DeFi up to the courts. Moreover, miners and validators, who were previously outside the provision would have been protected. The DeFi industry had reacted to those changes with disappointment and expressed concern that this lack of protection would chill innovation and development, although those concerns are now eliminated. The Agriculture Committee draft also imposed stricter guardrails on affiliate trading and conflicts of interest involving digital commodity exchanges, brokers, and dealers. The CFTC was to be tasked with writing rules to identify and resolve such conflicts.

Fourth, and perhaps most controversial, were ethics provisions which grew in depth and scope over the summer. These provisions were targeted almost entirely at President Trump's ongoing and well-known crypto interests. The controversy was fueled by reports of the president's recent disclosure statement indicating that he made $1.2 billion in income from crypto activities in 2025. The resulting public scrutiny was compounded by the activities of World Liberty Financial (WLF), a DeFi protocol and stablecoin issuer (USD1) controlled by President Trump's sons, as well as by Alex and Zach Witkoff, the sons of Trump advisor Steve Witkoff. WLF has also raised substantial amounts of money from the UAE. Unsurprisingly, the Democrat negotiators insisted on stricter ethics and conflict of interest provisions in the bill.

When negotiations stalled on September 13, the White House agreed to a series of ethics provisions similar to what had been proposed by Senators Tom Tillis (R-NC) and Ruben Gallego (D-AZ). The ethics provisions agreed to by the White House and included in the September 14 version of the Act include: (i) a ban on federal officials, including the president, from sponsoring or issuing digital assets, including meme coins; (ii) a requirement that the financial interest by covered officials in digital assets or in digital asset companies be either divested or placed in a blind trust; (iii) a requirement that any activity in violation of the anti-meme coin ban would automatically cause a prohibition for a digital commodities exchange offering or listing that coin on its exchange; (iv) authority of the Department of Justice to prosecute potential violations of these ethics provisions; (v) the ability of state attorneys general to investigate and prosecute ethics violations; and (vi) a standing provision that individual citizens of a state in which harm has been suffered could bring civil litigation to recover damages for that harm. Of course, the devil would have been in the details of these provisions, for example, in connection with the final definitions that might have been adopted. Moreover, agencies would have to develop rules in connection with the legislative mandates. These provisions would have taken effect 360 days after enactment or 60 days after the final implementing rules were adopted, whichever comes sooner. While their language was strict, these provisions would have been prospective in nature and give the potentially impacted officials ample time to "get their houses in order" to ensure compliance. Notably, the latest version of the Clarity Act also contains provisions expediting judicial review of any prosecution under this language thus eliminating (in theory) the threat of long and expensive prosecutions. Moreover, these ethics provisions would have expired on January 20, 2029, unless Congress reauthorized or renewed them, making their requirements challenging for those to whom they apply, but perhaps not the fuel for additional controversy that might appear to be at first blush. In the end, these concessions were not enough as the Democrats demanded that any covered official divest themselves of any crypto holdings over one million dollars in value, a unique demand no other asset class has ever faced.

Regulators and Stablecoin Issuers Move Ahead

The failure of the Clarity Act to get to the floor puts several things in focus that, in our view, are close to inevitable.

First, it puts a premium on rulemaking from the SEC and the CFTC as well as from the banking agencies. Given the Administration's pro-crypto stance, one can expect these rules to be developed and implemented in a rapid, though measured, fashion. In August, CFTC Chair Michael Selig said that if the Clarity Act remains stalled, his agency would utilize its existing authority to establish a regulatory framework for crypto markets, and "directed staff to engage with developers of on-chain finance protocols to establish ways in which developers can offer their protocols in a legal and compliant manner in the United States, future-proofing developer protections once and for all." SEC Chair Paul Atkins also said his agency will write crypto rules on its own authority. They did not wait long, with both agencies publishing significant exemptive relief for crypto less than 48 hours after the Clarity Act failed. The publication by the SEC of its "Innovation Exemption" appears to be a leading edge of the promises by the SEC in setting a new crypto regulatory framework. That release provided for two forms of conditional exemptive relief for a five-year period. First, it exempts certain trading venues called "tokenized securities venues" (TSVs) from the definition of "exchange" under section 3(a)(1) of the Exchange Act. Second, it exempts certain liquidity providers from the definition of "dealer" under section 3(a)(6) of the Exchange Act. Thus, stocks will be able to trade through permissioned automated market maker (AMM) pools for five years. Notably, the availability of the exemptions is structured on fulfillment of key conditions, such as: (i) compliance with economic and trade sanctions programs administered by OFAC; (ii) setting standards of access to only allow certain participants to trade tokenized stocks on the TSV; (iii) trading only tokenized NMS to stocks that were tokenized by the issuer of the underlying stock or security or tokenized by a third party affiliated with the issuer as long as such tokenization provides holders with the same rights and privileges as traditional securities holders, such as the receipt of dividends and voting rights; and (iv) providing issuers with the opportunity to object and prevent their security from being traded on a TSV.

On the same day, the CFTC issued a no-action letter providing an exemption which will allow "passive software providers" to connect with registered derivatives markets with wallets or other software apps without registering as introducing brokers or Futures Commission Merchants. This will ease the integration of wallets and apps in connection with prediction markets and perpetual futures. To qualify for the exemption, however, the software must not participate in or exercise discretion over order decisions.

The counterpoint to these proposals is that rules can be revised or reversed in a different Administration. While that is true, it will be difficult to unwind rational and balanced rules promulgated after notice and comment, in compliance with the Administrative Procedure Act. And the industry, of course, would have recourse to the courts to claim that any reversal is arbitrary and capricious. That would especially be the case if in reliance on those rules the industry continues to implement product and infrastructure changes that would be difficult to unwind. Unfortunately, because Congress has failed to act, courts may once more have to step in to play referee.

On Friday, September 17, the Office of the Comptroller of the Currency also granted national trust bank charters to three stablecoin issuers, Bastion Platforms Trust Company, Agora National Trust Bank, and Catena Trust Bank. Bastion plans to issue white-label stablecoins for other companies, offer fiduciary wallet services, and oversee custody of holding reserves and customer wallets. Catena is developing financial infrastructure specifically for artificial intelligence agents including accounts, custody, investment management, payments, treasury functions, and controls over what agents can do with fiat currency, investment securities, stablecoins and crypto. Building from the ground up will allow Catena to offer deterministic policy enforcement, immutable audit trails, and verifiable agent identity. When compared to the existing complex infrastructure and cores currently supporting banks, the savings on compliance alone appears evident. Agora, which applied for its charter in April, has said that in addition to developing its AUSD stablecoin, it is building a full financial operating system for global businesses, including settlement infrastructure, treasury management, investment advisory services, fiat connectivity, and tools that help companies interact with digital dollars. Thus, the pace of stablecoin advancement does not seem to have slowed and with new projects and use cases in the pipeline, a slackening of that pace does not appear anywhere on the near horizon. The absence of a ban on paying yields should attract even more developers and potentially make offering stablecoins even more attractive. And compared to the amendment or even reversal of rulemaking, reversing the grant of a bank charter would be considerably more difficult.

What the Market Faces Next

First, also on September 17, the CFTC submitted to the White House for review its draft crypto rules, titled "Regulation Crypto Asset Transactions and Regulation Crypto Asset Markets". While details are confidential during the initial White House review, it appears that among the objectives of the regulation would be to create a new crypto asset market exchange category and allow leveraged and margined crypto trading. The proposal was filed with the Office of Information and Regulatory Affairs (OIRA) within the Office of Management and Budget (OMB) which reviews federal regulations before publication. That process will take up to 90 days, and then an agency vote will follow the White House review and public comment periods will open up later. Final binding rules would be expected no sooner than late 2027. 

Second, the failure of the Clarity Act to advance likely will be negative for smaller banks. Because there now are no legislative limits on yield and/or rewards that can be paid in connection with payment stablecoin use, community banks that have avoided engaging with crypto—that is, most of them—will now have to operate on a more expensive infrastructure model, as well as one that is hostage to the contracts that they have signed with their core providers, making it far more difficult to compete against innovative digital asset products. That will place most community banks outside of the innovations that are likely to continue, particularly in connection with tokenized stocks, bonds, funds, and real-world assets. Because that may put community banks at a competitive disadvantage in terms of product offerings, it would be reasonable to expect continued consolidation in that sector going forward driven by an effort to gather the resources to develop and adopt innovative customer solutions.

Third, crypto innovation will not stall or even pause. Crypto development is both global and continuous (i.e., 24/7/365). New use cases that will both improve customer experience and infrastructure are evolving literally every day. That will not stop. Agentic AI will soon have a profound impact on day-to-day commerce at the institutional level. That activity will run on blockchain rails on which value will be exchanged with digital tokens. The absence of a statutory framework will not slow further adoption and experimentation, at least over the next two years while the industry is dealing with a friendly administration that will remain open to unbridled innovation. Critically, though, part of that innovation must be the adoption and implementation of safety, security, and anti-fraud features. The disasters of Terra Luna, FTX, Celsius, Voyager, and the like cannot be repeated. The failure to prevent fraud and protect consumers, and the likely advent of another "crisis" will almost certainly result in hostile regulation and legislation similar to the fallout from the Dodd-Frank Act, a circumstance that would cause crypto in the United States to be severely limited.

Fourth, larger banks, which already understand the benefits of crypto, will continue to invest—particularly in crypto infrastructure. In a repeat of the results of Dodd-Frank, which did not end "too big to fail" but rather enhanced it, the failure of the Clarity Act will allow large banks to experiment, perfect, and roll out crypto use cases within their environments without having the burden of registration and disclosure obligations. Such an enhancement to their competitive position marks them as overall winners in the long-term crypto race. Incumbency has its advantages and large banks have been and are using those advantages quite well. Put another way, the failure of the Clarity Act does not mean that crypto is "going away." It will simply change the competitive calculus in favor of large and well-resourced entities and tilt the scale significantly against smaller players who simply cannot afford the talent and the technology to become adopters. Thus, one can confidently expect a further shrinkage of the number of banks throughout the United States as our banking market begins to evolve toward a more Canadian/European model in which financial services are provided almost entirely by large providers.

Finally, because DeFi has avoided legislative regulation, it lives to fight another day as a potential competitor for banking services. Because DeFi is based on open-source concepts and is not burdened by many of the internal costs of traditional finance, this may potentially create a breakout opportunity so that there will be further building and innovation along with the development and refinement of customer experiences, as well as safety and security.

Thus, while the opportunity for legislative certainty over the next four years and perhaps longer seems to have disappeared, the opportunity for the market to step into that void is now a real possibility. Will the market respond with measured responsible development which promotes innovation, as well as safety and security? Or will the absence of legislation create opportunities for reckless speculation and the inevitable crash that is sure to follow? Those are the fundamental questions that remain unanswered.

Our Take

The failure of the Clarity Act is not likely to slow down the development of new crypto products and use cases. In fact, blockchain tools will continue to be more broadly used within banking infrastructure than ever before. The test for crypto will be whether it can establish credible self-regulatory standards that will make future legislation either unnecessary or limited in its impact. Whether legislation will return is almost entirely a political issue, but we do not foresee a new bill being able to garner 60 Senate votes in the near- or mid-term.

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Stephen Gannon and Elizabeth Davis are partners in the financial services group in the Washington, D.C., office of DWT. For any questions, please reach out to the authors or another member of our financial services team. To stay informed, sign up for our alerts.