Crypto Decentralization Era Takes Shape as CLARITY Act Advances

The House’s passage of H.R. 3633—the Digital Asset Market Clarity Act—last week by a 294–134 bipartisan vote represents a fundamental doctrinal pivot in US cryptocurrency regulation, moving from the ambiguities of traditional securities frameworks to a function-based model centered on asset characteristics and network maturity.

For legal practitioners advising on token issuances, exchanges, or custody arrangements, this development resolves longstanding uncertainties under the Howey test while introducing immediate compliance imperatives. The legislation also highlights potential Senate modifications that could reshape the landscape.

With the CLARITY Act, Congress establishes a clear jurisdictional divide between the Securities and Exchange Commission and the Commodity Futures Trading Commission. The SEC retains oversight of “investment contract assets” during their initial issuance phase, where tokens are sold with expectations of profit from others’ efforts, as seen in landmark cases such as SEC v. Ripple Labs.

Once these assets achieve “maturity”—defined as networks with no more than 20% control by affiliated entities—they transition to CFTC jurisdiction as “digital commodities.” This maturity threshold was refined during committee markups to prevent “decentralization theater.” It directly addresses judicial critiques in cases such as SEC v. LBRY, where promotional efforts overshadowed functional utility.

The shift could reduce litigation volumes based on recent trends showing declines in crypto filings, by providing a statutory path from securities-like treatment to commodity status.

Decentralized finance receives particular attention through broad safe harbors. Non-custodial protocols that maintain open-source code and control below 5% are exempt from registration, though they remain subject to anti-fraud and anti-manipulation enforcement.

This provision rewards genuine decentralization but demands rigorous governance audits. Practitioners should draw from precedents such as the CFTC’s Ooki DAO action, where the platform’s founders retained hidden operational control over a nominally decentralized organization.

The Northern District of California, effectively treating Ooki DAO as a general partnership, imposed unlimited personal liability on those founders. The framework incentivizes transparent, algorithmic decision-making over centralized models, potentially accelerating DeFi adoption while mitigating risks of hidden manipulation.

Stablecoins are carved out from digital commodity definitions if they qualify as “permitted” assets, aligning closely with the GENIUS Act’s reserve mandates for high-quality liquid assets. Issuers face a $10 billion market cap threshold for enhanced scrutiny, added during markup to counter illicit finance concerns.

This doctrinal exclusion treats stablecoins as payment tools rather than investments, enabling federal preemption of state licensing and streamlining interstate operations. Yet it introduces compliance hurdles: monthly attestations and on-demand redemptions at par value, with failures risking reclassification and penalties.

Custody provisions mark another key doctrinal advance, mandating qualified custodians to segregate customer wallets using multi-factor key management and deliver annual SOC-1/SOC-2 audits. These rules, responding directly to the FTX collapse where commingled assets erased billions in customer value, elevate self-custody rights while classifying segregated holdings as bankruptcy-priority “customer property.”

For practitioners, this means immediate policy revisions: Implement daily reconciliations and proof-of-reserves protocols to avoid misuse prohibitions that could trigger criminal liability.

The bill’s path to passage during “Crypto Week” underscores the evolving political doctrine around digital assets. An initial procedural rule failed 196–223 on July 15 when Freedom Caucus Republicans demanded explicit bans on central bank digital currencies, echoing President Donald Trump’s January executive order prohibiting them.

Trump’s personal intervention—meeting with holdouts on July 16 and securing attachments to the National Defense Authorization Act—flipped the vote to 217–212 after a record nine-hour session.

The final tally, with 216 Republicans and 78 Democrats supporting, exceeded expectations but revealed fractures: Democratic leadership opposed over perceived gaps in consumer safeguards, while Republicans balanced innovation with anti-surveillance priorities.

Modest bipartisan support propelled CLARITY through the House, yet the narrow procedural margin could complicate its Senate journey. Senate Banking Chairman Tim Scott (R-S.C.) supports a Sept. 30 markup. Secondary referral to the Agriculture Committee—mirroring the House’s dual-committee process—is expected.

Clearing the Senate floor will require 60 votes to break a filibuster, unless drafters can fold qualifying provisions into a budget-reconciliation package, a maneuver that faces stringent Byrd-Rule tests.

Reconciliation might involve merging aspects of CLARITY with aspects of the Lummis-Gillibrand market-structure proposal or the GENIUS Act stablecoin bill. Alternatively, Senate committees might address Democratic concerns through bipartisan tweaks, such as tightening DeFi anti-money laundering rules or requiring more robust “maturity” disclosures.

For practitioners, provisional registration opens a 270-day window post-enactment to align operations. Map client portfolios to the maturity lifecycle now and draft anti-money laundering and Bank Secrecy Act enhancements tied to FinCEN guidance.

Strategic opportunities abound: Leverage preemption for multi-state scaling and advise on DeFi audits to claim exemptions, potentially slashing costs based on industry projections.

Yet balance risks—post-Jarkesy, enforcements may face more judicial scrutiny, but overreach in Senate amendments could stifle US competitiveness against the Markets in Crypto-Assets Regulation’s EU harmonization.

CLARITY’s functional doctrine—prioritizing network decentralization over issuer efforts—heralds crypto’s maturation from regulatory patchwork to structured asset class. As Senate negotiations unfold, this could echo the Glass-Steagall Act for traditional finance in establishing enduring digital safeguards, demanding agile adaptation from practitioners to secure client positioning in the post-CLARITY era.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Seth C. Oranburg is a professor at the University of New Hampshire Franklin Pierce School of Law and director of the Program on Organizations, Business, and Markets at NYU Law’s Classical Liberal Institute.

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