DeFi Scores Meaningful Wins in CLARITY Act

As we celebrate ‘Crypto Week’ in the U.S. House of Representatives, the DEF team has compiled a blog post looking at the potential implications for DeFi in the latest text of the CLARITY Act, which was recently advanced by the House Rules Committee to the House floor for votes.

This latest draft of market structure legislation represents meaningful progress towards achieving greater regulatory clarity and critical protections for DeFi developers, users, and technology in the United States. The CLARITY Act represents a purposeful effort to differentiate between DeFi and centralized intermediaries – a strong step forward for the DeFi industry. The bill contains accurate definitions for DeFi, correctly excludes DeFi from the regulations suited for centralized intermediaries, creates a framework to assess decentralization, establishes a good first effort at protections for self-custody, and scores durable wins for the digital assets industry. While we still have some work to do to ensure DeFi is fully protected from improper regulations, we look forward to working with Senate offices to do so.

Below are the top five positive outcomes for DeFi in the recent draft text of the CLARITY Act, as well as areas where we will continue advocating for DeFi as market structure legislation progresses through Congress.

1. “TREATMENT OF CERTAIN NON-CONTROLLING BLOCKCHAIN DEVELOPERS” -  This section includes key text from the Blockchain Regulatory Certainty Act (BRCA), creating critical protections for “non-controlling” software developers and service providers and ensuring they are not “treated as a money transmitter or as engaged in ‘money transmitting’” under applicable state and federal law. This is a major win for DeFi. 

2. “DEFINITIONS UNDER THE SECURITIES ACT OF 1933 & DEFINITIONS UNDER THE SECURITIES ACT OF COMMODITIES EXCHANGE ACT” - The DeFi definitions and related technology definitions accurately describe and account for the realities of decentralized technology, and appropriately differentiate them from any centralized intermediaries. 

3. “RULEMAKINGS” (SELF-CUSTODY PROTECTIONS) - The latest draft contains a ‘right to self-custody,’ which is a good acknowledgment of how important it is to protect the right of individual Americans to self-custody their own assets, just as they can do with cash. This was a core priority in President Trump’s Crypto Executive Order. We are hopeful that the Senate will build on this language to extend these protections to entities (in addition to individuals) and to include a private right of action or a specific restriction on a government entity infringing on the right to self-custody. To that end, we were excited to see Senators Ted Budd (R-NC) and Mike Lee (R-UT) introduce the Senate’s version of the Keep Your Coins Act, the House self-custody protection bill by Rep. Warren Davidson (R-OH) that inspired this portion of CLARITY.

4. "EXCLUSIONS FOR DECENTRALIZED FINANCE ACTIVITIES" - The CLARITY Act makes meaningful progress in protecting certain DeFi activities from the registration and compliance requirements suited for centralized intermediaries and covered registrants. Sections 309 and 409 exclude certain DeFi activities from securities and commodities regulation, such as developing and publishing DeFi protocols and messaging systems, validating network transactions, and operating a node or oracle. These exclusions, many of which were added to CLARITY in a manager’s amendment, specifically ensure the inclusion of crucial protections for the software engineers building DeFi infrastructure. We will encourage the Senate to expand those protections to DeFi derivatives protocols in addition to those related to spot transactions.

5. “STUDY ON DECENTRALIZED FINANCE”- The latest draft mandates a study by the Commodity Futures Trading Commission and Securities and Exchange Commission, in consultation with the Secretary of Treasury, which analyzes technical features and policy implications of elements of decentralized protocols, decentralized governance, illicit finance, user privacy, and blockchain technology.

While we’re making important progress and great strides to protect software developers through market structure legislation in the United States, there is work to be done. For example, as drafted, CLARITY does not extend federal preemption to the “exclusions for decentralized finance activities,” leaving states free to create different, inconsistent rules. It’s important to close this gap and ensure that after all of the hard work Congress is doing to create clear laws for the industry, we don’t end up with a patchwork of 50 state laws taking differing positions.

Changes are happening in real-time, especially as incumbent legacy institutions wake up to the reality that, if given regulatory clarity and appropriate protections, DeFi developers could build technology and businesses that create better products and services, with lower costs and fees, and with an overall better user experience. We should expect that they will deploy significant resources in D.C. to protect their market control. 

That’s why it’s critical for DeFi to have representation in D.C. There is still work to be done to strengthen DeFi protections in market structure legislation, and the DEF team is fully committed to continuing to champion DeFi issues and to securing wins for DeFi as the policymaking process goes on. 

We are grateful for the extremely hardworking leaders and staff in the House who have spent countless hours engaging with the industry, making the time to understand digital assets and DeFi technology, and working hard to draft legislation that helps to move digital assets forward in the United States. We look forward to continuing our efforts to educate and advocate for DeFi with Senate leaders.