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All You Need to Know About the CLARITY Act – Why it Matters and What to Know
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2025-07-29 | 25m
The CLARITY Act has successfully passed through the U.S. House of Representatives, signifying the creation of the first definitive regulatory framework for the cryptocurrency sector and concluding years of regulatory uncertainty. The legislation seeks to clarify the distinct responsibilities of the SEC and CFTC, regulate secondary market trading, safeguard consumers, and offer legal clarity for DeFi and stablecoins—positioning the United States to take the lead in global competition regarding blockchain infrastructure.
Recently, the House of Representatives has advanced a significant new "market structure" bill with substantial bipartisan support (294 to 134, including 78 Democrats). This legislation, known as the Digital Asset Market Clarity Act or the "CLARITY Act" (HR 3633), aims to create a transparent regulatory framework for digital asset markets. The bill is now moving to the Senate, which is developing its own version of market structure legislation that will be informed by the CLARITY Act.
If enacted, this legislation will set forth clear guidelines for blockchain systems—putting an end to the years of ambiguity that have hindered innovation, exposed consumers to risks, and favored those profiting from a lack of transparency over entrepreneurs striving for openness. Similar to the Securities Act of 1933, which established investor protections and facilitated a century of capital formation in the U.S., the CLARITY Act has the potential to be a landmark piece of legislation.
When our legal frameworks are crafted to both encourage innovation and protect consumers, America takes the lead—and the global community reaps the benefits. CLARITY represents such an opportunity. While this legislation builds upon the bipartisan momentum of last year’s FIT21 bill, CLARITY enhances it in several significant ways, which we will detail below: addressing what builders need to understand, and explaining why this bill is essential for aligning innovation, consumer protection, and U.S. national security.
With the recently signed GENIUS Act (more information on how that integrates below), the necessity for a more comprehensive market structure bill is even more pressing.
Why The Clarity Act Matters?
Even though the crypto industry has been around for over a decade, there hasn’t yet been a comprehensive regulatory framework for it in the United States. But crypto is no longer just a movement among tech insiders — it’s become infrastructure: Blockchain systems now underpin payment systems (including via stablecoins), cloud infrastructure, digital markets, and much more.
But these protocols and applications are being built without clear rules. The result? The legitimate entrepreneurs face regulatory whiplash, while the profiteers exploit legal ambiguity. Passing CLARITY would flip this dynamic.
By giving projects a transparent path to compliance — and ensuring regulators have better tools to police real risks — CLARITY (alongside the new stablecoin bill known as the GENIUS Act) would bring the already massive crypto industry out of the shadows and into the regulated economy. The new legislation creates a framework for responsible innovation, much like the foundational laws that helped public markets flourish as well as protect consumers in the 20th century.
Besides providing a well-defined path to compliance, this bill provides more clear rules — giving entrepreneurs the legal certainty they need to innovate confidently and operate domestically. This would finally reduce the pressure on legitimate entrepreneurs to launch offshore (or to use inefficient and opaque structures to avoid regulation).
Such legal clarity would open the door to the next generation of decentralized infrastructure, financial tools, and user-owned applications — all built in the United States. Ensuring that blockchain systems are developed in the U.S. would also safeguard the world’s digital and financial infrastructure from becoming reliant on blockchain systems created and controlled by China, for instance, while also ensuring U.S. Regulatory standards apply to core financial infrastructure that many more people beyond crypto are now using.
What Would This New Legislation Do?
CLARITY introduces three pivotal frameworks. First, it creates a "control-based maturity" pathway for digital commodities – assets granting blockchain ownership rights. Projects evolve from SEC to CFTC oversight as they achieve verifiable decentralization through seven objective criteria, eliminating subjective "efforts-based" tests. Second, centralized intermediaries (exchanges, brokers) must register with the CFTC and adhere to traditional financial compliance standards, closing oversight gaps exposed by failures like FTX. Third, the Act mandates consumer safeguards including issuer disclosure requirements and strict insider trading prohibitions.
Create a clear regulatory pathway for digital commodities
The CLARITY Act creates a regulatory framework for digital assets — referred to as “digital commodities” — that give users ownership in blockchain systems.
The bill’s control-based maturity framework allows blockchain projects to launch digital commodities and access public markets without undue regulatory burdens or uncertainty.
Enable oversight of blockchain-based intermediaries
The bill ensures that centralized actors in crypto — such as exchanges, brokers, and dealers — are subject to robust oversight. These intermediaries would be required to register with the CFTC; and adhere to compliance standards similar to those that govern traditional financial institutions.
These requirements bring more transparency to core market infrastructure, help prevent fraud and abuse, and reinforce consumer trust. They also close the current regulatory gap — which allowed firms like FTX to operate unchecked in the U.S. market.
Protect consumers with strong safeguards, while fostering innovation
The CLARITY Act has direct consumer protection measures as well, including: mandatory public disclosure obligations for digital commodity issuers — ensuring that retail participants have access to basic, material information; and also restrictions on insider trading — limiting the ability of early stakeholders to exploit information asymmetries at the expense of users.
These measures also help foster innovation by providing a clearer roadmap for entrepreneurs to build decentralized blockchain systems.
Which Government Agency Would Have Regulatory Oversight?
The CLARITY Act would provide a clear, structured pathway for digital assets to transition from the Securities and Exchange Commission (SEC) to oversight by the Commodity Futures Trading Commission (CFTC).
Let’s compare how current law, and the CLARITY Act, if passed, can address the unique properties of blockchain systems:
| Aspect | Current law | The CLARITY Act |
| Initial Digital Asset Fundraising Transactions | When digital assets are first sold in fundraising transactions (like “token sales”), the transaction is subject to securities laws and SEC jurisdiction. | No change here — When digital assets are first sold in fundraising transactions (like “token sales”), the transaction is subject to securities laws and SEC jurisdiction. |
| Jurisdiction Transition for Secondary Market Transactions | The transition of jurisdiction over secondary market transactions from the SEC to the CFTC is unclear and subject to weaponization by overzealous regulators — the test is based on a subjective and ambiguous 40 - factor decentralization framework created by the SEC in 2019. | The transition of jurisdiction over secondary market transactions from the SEC to the CFTC would be clearly defined and automatic (scalable to administer) — the test is based on objective and simple criteria for whether a digital asset is a “digital commodity” (that is, it does not pose security - like risks). |
| Disclosures | No disclosures are required, which doesn’t protect consumers. | Disclosures are required — and the SEC retains oversight of those disclosures. |
| Insider Participation in Secondary Markets | Insiders have few restrictions on participating in secondary markets, only having to hold a digital asset for one year. | Insiders face more restrictions from participating in secondary markets — including being limited until a blockchain system becomes a “mature blockchain system” (the blockchain system must not be controlled by anyone). This would help prevent pump - and - dump behavior and incent ongoing innovation. |
The above pathways are based on a finely calibrated, “control-based” risk framework; more on that below.
How Does a ‘Control-based’ Maturity Framework Work?
Unlike the SEC's 2019 subjective "efforts-based" decentralization test – whose ambiguous standards could be misapplied against legitimate projects – the CLARITY Act establishes an objective, control-based maturity framework. This system evaluates decentralization through seven measurable criteria focused specifically on
who controls the blockchain network and its digital assets. Aligning with established regulatory approaches like money transmission oversight, it eliminates perverse incentives that forced developers to halt progress to avoid appearing "too centralized."
The framework dynamically adjusts regulatory requirements based on risk: During early development phases (when control is concentrated), projects face securities-level disclosure rules and operational constraints. As projects meet predefined decentralization thresholds (demonstrating dispersed control), regulatory burdens progressively reduce to commodity-level oversight. Like prior proposals such as FIT21, CLARITY maintains two core safeguards throughout this journey: mandatory transparency disclosures to combat information asymmetry, and insider trading restrictions preventing early stakeholders from profiting before maturity.
CLARITY's breakthrough lies in its seven specific, engineering-verifiable control-transfer criteria (like protocol amendment authority distribution and governance token dispersion). This replaces FIT21's subjective judgments with an "elimination-of-control" paradigm that simultaneously:
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Prevents insiders from exploiting information advantages
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Allows legitimate builders to innovate without regulatory uncertainty
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Lowers compliance costs through clear benchmarks
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Simplifies enforcement through objective metrics
Fundamentally, this framework solves the core incompatibility between traditional securities laws and blockchain assets – whose risk profiles dynamically evolve from security-like to commodity-like as networks decentralize. This balanced approach to fostering innovation while protecting consumers has gained broad industry endorsement.
What Are Implications to Specific Industries Like DeFi?
The CLARITY Act offers substantial protections for decentralized finance (DeFi). Specifically, the legislation exempts DeFi protocols and applications from the regulatory obligations imposed on intermediaries (such as exchanges and brokers) involved in digital commodity transactions; it also sets forth criteria for DeFi systems to qualify. A DeFi system must refrain from acting as an intermediary — thereby ensuring that it does not reintroduce the very risks that regulation aims to alleviate.
Furthermore, the bill would provide DeFi projects with the legal certainty necessary to launch and market their own native tokens — activities that were previously fraught with risk and ambiguity; it allows for decentralized governance — without the danger of being deemed centralized; and it supports self-custody — a practice many engaged in before, but now individuals would have, through this legislation, a “right to self-custody.”
Overall, CLARITY creates a level playing field for DeFi projects to compete with. This also facilitates the integration of the advantages of decentralized finance into our wider financial system, unlocking its full potential for consumers at large.
Nevertheless, the CLARITY Act is not without its flaws. By concentrating exclusively on digital commodities, it overlooks other regulated digital assets such as tokenized securities and derivatives. Additionally, while CLARITY exempts DeFi systems from federal intermediary regulations, it does not override state regulations — which leaves the DeFi sector susceptible to inconsistent or excessive state-level policies. These shortcomings should be rectified in the Senate, through future legislation, or via coordinated regulatory guidance (such as rulemaking by the SEC and CFTC).
Is CLARITY Better Than What We Have Right Now?
Yes; the CLARITY Act makes important improvements over how things are currently run because right now, the industry doesn’t have enough oversight. Some might think that having no rules at all is better than having any regulations, but without clear rules, bad actors and scammers often take advantage of the confusion to exploit everyday users. This lack of clarity can also lead regulators to act without proper limits. For example, FTX is a major case showing these problems, causing harm not just to the industry as a whole but to thousands of individual consumers. If we don’t act now, we risk allowing more bad actors like the former FTX CEO to cause similar issues in the future.
The industry also lacks transparency. Without mandatory disclosures and clear standards for listing projects, consumers are sometimes exposed to scams and dishonest schemes. This lack of openness has created a “casino-like” environment focused on speculation rather than innovation, leading to the rise of risky and hype-driven products like memecoins.
Moreover, there are not enough protections in place. Without clear limits on what federal agencies can do, blockchain and decentralized finance projects are vulnerable to overreach — similar to what happened during previous administrations where regulations went beyond reasonable bounds.
The industry also doesn’t have well-defined standards. Without rules around how decentralized a network needs to be, users may not realize the risks they face. For instance, they might believe their assets, including stablecoins, are safe when, in fact, if a single person or group controls the system, they could easily shut it down or manipulate it. As industries grow and mature, establishing clear standards becomes more common and necessary.
How does the CLARITY Act compare to earlier efforts like the Financial Innovation and Technology for the 21st Century Act (also called FIT21)? CLARITY builds on what we learned from FIT21 and makes things even better:
1. It offers more transparency by fixing gaps in FIT21 that would have allowed some older projects to avoid sharing important information. CLARITY creates a clear framework for applying disclosure rules to existing projects still active today.
2. It provides stronger protections for consumers by limiting how much insiders can take advantage of their informational advantage. For example, CLARITY restricts insiders from selling off their holdings before a project is fully developed and stable.
3. Its approach to measuring how "mature" a project is focuses on control and decentralization, replacing FIT21’s unclear methods with a clearer, more precise system. CLARITY uses seven specific, measurable standards to decide whether a blockchain project has reached maturity.
4. It enhances government oversight and gives regulators more flexibility to adapt as the industry changes and grows, helping the regulatory system stay effective and scalable over time.
How Does the CLARITY Act Fit with the GENIUS Act?
The newly enacted "Guiding and Establishing National Innovation for U.S. Stablecoins" (GENIUS) Act marks a significant advancement in the modernization of our financial system. The House has made history by passing this pivotal legislation with overwhelming bipartisan support (308 to 122, including 102 Democrats). Nevertheless, this new stablecoin legislation greatly amplifies the necessity for more comprehensive market structure legislation such as CLARITY. Why is this the case? Because GENIUS will expedite the adoption of stablecoins — and consequently, the shift of more financial activities onto blockchains — thereby increasing dependence on blockchains for extensive payments and commerce. This trend is already underway, as ubiquitous payment processors, traditional financial institutions, established payment networks, and various other entities increasingly accept and utilize stablecoins.
However, the existing stablecoin legislation fails to regulate the blockchains that facilitate the movement of these assets — it imposes no requirements for the security, decentralization, or transparent governance of these networks. This oversight places consumers and the broader economy at risk of new systemic vulnerabilities. With GENIUS now enacted into law, the urgency for CLARITY has intensified. CLARITY offers the necessary standards and oversight to ensure that the infrastructure supporting stablecoins — including the underlying blockchains, protocols, and other tools — adheres to safety, transparency, and control standards. Its specific, measurable criteria for defining a mature blockchain system also provide clearer guidance for entrepreneurs on how to achieve compliance with these standards. In the absence of these complementary safeguards — the GENIUS Act, in conjunction with the CLARITY Act — the rapid adoption of stablecoins could lead to the utilization of unregulated, opaque, or even hostile infrastructure. The passage of CLARITY guarantees that stablecoins function on secure networks, thereby enhancing consumer protection, mitigating financial risks, and bolstering the strength and leadership of the U.S. dollar in the forthcoming evolution of financial systems.
What Comes Next?
With the passage of CLARITY in the U.S. House of Representatives, the bill is now set to be forwarded to the Senate. In the Senate, the Banking Committee and Agriculture Committees may opt to address it, implement modifications through their respective markup procedures, and subsequently advance it to the full Senate for a vote.
However, it is more probable that a bipartisan coalition of Senators will propose a distinct Senate version of a crypto market structure bill, which is expected to share many similarities with CLARITY. The Senate Banking and Agriculture Committees would then evaluate that bill through their own procedures and, if it receives approval, send it to the Senate floor for a vote.
Should both chambers of Congress approve their individual bills, the House and Senate will need to reconcile any discrepancies—either through an informal negotiation process or a more structured conference committee—before each chamber votes to pass the final compromise version.
When is this likely to occur? Key leaders in the House and Senate have established a target of delivering a market structure bill to the President for signing by the end of September.
Conclusion
The CLARITY Act represents more than cryptocurrency regulation—it establishes the constitutional foundation for next-generation internet infrastructure. By providing legal certainty comparable to the early TCP/IP standardization process, this framework enables responsible development of decentralized systems that could redefine digital ownership, cross-border finance, and computational trust mechanisms. Its passage would catalyze an estimated $12.4 trillion in blockchain-integrated economic activity by 2035 while preventing the fragmentation of global digital infrastructure along geopolitical fault lines. As committee deliberations intensify, engaged advocacy remains crucial to ensure America maintains technological sovereignty rather than ceding blockchain's revolutionary potential to jurisdictions with fundamentally incompatible values regarding financial privacy, innovation freedom, and democratic governance.
CoinCatch Team
Disclaimer:
Digital asset prices carry high market risk and price volatility. You should carefully consider your investment experience, financial situation, investment objectives, and risk tolerance. CoinCatch is not responsible for any losses that may occur. This article should not be considered financial advice.
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