Clarity Act Updates
A big step forward for crypto
The past week was a big one for crypto policy. TL;DR is that the digital asset market structure bill, a.k.a. the Clarity Act, had a new draft released by the Senate banking committee, and that draft then passed out of committee with minimal amendments and bipartisan support. There’s still a lot between now and Clarity becoming law, but this is a big step forward for the industry.
The pre-amendment May draft included several notable changes from the earlier January draft–these changes are explained in detail by Alex Thorn here. The most consequential ones are as follows:
Stablecoin yield: This has been arguably the most contentious element of digital asset policy over the past year. The Genius Act, which passed into law last year, prohibited stablecoins from paying “yield”, but left open a number of potential mechanisms by which they could reward their holders in ways that are functionally identical to yield. The banking lobby, which is unsurprisingly quite influential in Congress, has been very unhappy about this, worrying that it might make it harder for them to attract deposits. The banking committee’s January draft placed some further restrictions on stablecoin reward structures, and the May draft tightened these even further, allowing only reward structures that are not economically identical to bank deposit yield. The crypto industry broadly thinks this goes too far, and the banks think it doesn’t go far enough, but it may have been a necessary step towards getting the bill this far.
DeFi protections: The May draft expanded the scope of protections for software developers and auxiliary service providers in DeFi. This makes it easier for these parties to provide neutral infrastructure like baseline protocols, oracles, or validation without exposing themselves to liability for those tools’ misuse by bad actors. Knowing facilitation of crime still creates liability (standard mens rea), but this makes it easier for people and companies to build useful tools without worrying about others misusing them (similar to the Telecommunications Act of 1996). Overall a great provision.
SEC rulemaking authority: Whereas the January draft created joint rulemaking authority for the SEC and CFTC over all tokenized real world assets, including both securities and commodities, the new draft draws a clearer line between the two, giving the SEC more discretion over securities (and implicitly leaving more room for CFTC discretion over commodities, though that will have to be made explicit in the agriculture committee draft). This is good news for the SEC’s ability to continue issuing no-action relief and staff guidance to innovators in the space, which has been a big theme under the current Atkins administration.
Housing funding: As a non sequitur that shines some light on the sausage-making process that is Congress, the Clarity Act now includes a provision that makes the awarding of Community Development Block Grants, a federal grant program that funds state-level housing and infrastructure projects, scale based on states’ rates of housing growth. This is a good change–it rewards states for removing barriers to housing construction–but it has nothing to do with digital assets. It’s just there to win the support of John Kennedy (R-LA) and to somewhat placate Elizabeth Warren (D-MA).
Aside from these substantive elements, it’s worth noting that Clarity passed out of the banking committee with all 13 Republican votes and two of eleven Democratic votes, for a total count of 15-9. The two Democrats voting in support were Angela Alsobrooks (MD), who played a major role in brokering the stablecoin compromise, and Ruben Gallego (AZ), the ranking Democrat on the Digital Assets Subcommittee. Good on them for supporting innovation despite the unfortunate partisan valence of crypto policy these days.
Next, the Senate agriculture committee, which has authority over the CFTC, has to produce its own draft, which then has to be reconciled with the banking draft, and then that version has to be reconciled with the House’s version, which passed last July. Lastly, the President has to sign it, which is almost guaranteed if it gets that far.
Big picture, this is not a perfect bill, but still considerably better than no legislative action on crypto because it establishes clear policy that will prevent regulators from swinging too much from one presidential administration to the next. It’s very hard for most businesses to operate under this kind of uncertainty, so I and the rest of the Groma team will be rooting for Clarity to pass despite its imperfections.