The House of Representatives recently approved H.R. 3633, known as the Digital Asset Market Clarity Act, with a significant bipartisan vote of 294-134. This legislative action marks a crucial change in how the U.S. approaches cryptocurrency regulation. It shifts away from traditional securities laws’ ambiguities and adopts a functional framework that focuses on the specific characteristics of digital assets and the maturity of their underlying networks. You can review the full text of H.R. 3633 on the official congressional website.
For lawyers advising on token offerings, cryptocurrency exchanges, or custody services, this Act provides clarity on issues previously complicated by the Howey test. However, it also introduces new compliance responsibilities. Furthermore, upcoming discussions and potential revisions in the Senate may significantly alter the Act’s final form and impact.
The CLARITY Act seeks to establish a distinct jurisdictional boundary between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). The SEC will maintain authority over “investment contract assets” during their initial offering phase. This includes scenarios where tokens are marketed with the expectation of profit derived from the efforts of others, drawing parallels to well-known cases such as SEC v. Ripple Labs.
After these assets reach a state of “maturity,” defined as networks where affiliated entities control no more than 20%, regulatory oversight will shift to the CFTC, classifying them as “digital commodities.” This threshold was adjusted during committee reviews to prevent superficial decentralization, addressing criticisms raised in court cases like SEC v. LBRY, where promotional activities overshadowed the asset’s practical use. The pivot towards decentralization could offer clear guidelines for determining whether a digital asset is a commodity or a security.
This shift could result in fewer lawsuits in the cryptocurrency space, given recent trends showing a decrease in crypto-related filings, by providing a legal pathway for assets to transition from security-like regulation to commodity status.
The Act pays specific attention to decentralized finance (DeFi) through extensive safe harbor provisions. Non-custodial protocols with open-source code and control levels below 5% will be exempt from registration requirements, although they will still be subject to anti-fraud and anti-manipulation regulations.
This provision incentivizes genuine decentralization. Practitioners will need to conduct thorough governance audits, paying close attention to cases like the CFTC’s Ooki DAO action, where platform founders retained hidden control despite the organization’s ostensible decentralization.
In the case of Ooki DAO, the Northern District of California effectively considered the DAO a general partnership and imposed unlimited personal liability on the founders. This precedent encourages transparent, algorithmic decision-making instead of centralized control, potentially boosting DeFi adoption while reducing the risks of covert manipulation.
Stablecoins are excluded from the definition of digital commodities if they meet the criteria for “permitted” assets, aligning closely with the GENIUS Act’s requirements for reserves held in high-quality liquid assets. Issuers with a market capitalization of $10 billion or more will face increased scrutiny, a measure added to the Act to address concerns about illicit financing.
By treating stablecoins as payment tools rather than investments, this exclusion allows for federal preemption of state licensing regulations, streamlining operations across state lines. However, this introduces new compliance challenges, including monthly attestations and on-demand redemptions at par value. Failure to comply risks reclassification and penalties.
The custody provisions in the Act represent another significant development. They require qualified custodians to separate customer wallets using multi-factor key management systems and to provide annual SOC-1/SOC-2 audits. These rules respond directly to the FTX collapse, where commingled assets led to billions in customer losses. They enhance self-custody rights while classifying segregated holdings as “customer property” with bankruptcy priority.
Legal professionals must immediately revise policies to include daily reconciliations and proof-of-reserves protocols to avoid misuse prohibitions that could lead to criminal charges.
The bill’s progress during what has been dubbed “Crypto Week” highlights the shifting political views on digital assets. An initial procedural rule failed 196-223 on July 15 due to Freedom Caucus Republicans demanding explicit bans on central bank digital currencies, echoing President Donald Trump’s January executive order prohibiting them.
After President Trump’s intervention with the holdouts, the vote was flipped to 217-212 after a record nine-hour session.
The final vote count, with 216 Republicans and 78 Democrats in support, surpassed expectations but revealed divisions within both parties. Democratic leaders opposed the bill due to perceived shortcomings in consumer protection, while Republicans balanced the desire for innovation with concerns about surveillance.
While CLARITY received modest bipartisan support in the House, its narrow procedural margin suggests a challenging path through the Senate. Senate Banking Committee Chairman Tim Scott (R-S.C.) is advocating for a Sept. 30 markup. A secondary referral to the Agriculture Committee, mirroring the House’s dual-committee process, is anticipated.
To pass the Senate floor, the bill will likely require 60 votes to overcome a filibuster, unless bill sponsors incorporate qualifying provisions into a budget-reconciliation package, which is subject to rigorous Byrd-Rule tests.
Reconciliation could involve merging aspects of CLARITY with the Lummis-Gillibrand market-structure proposal or the GENIUS Act stablecoin bill. Alternatively, Senate committees might address Democratic concerns through bipartisan adjustments, such as strengthening DeFi anti-money laundering rules or requiring more comprehensive “maturity” disclosures.
For practitioners, provisional registration opens a 270-day window following the Act’s enactment to adjust their practices. It is advisable to begin mapping client portfolios to the maturity lifecycle and developing anti-money laundering and Bank Secrecy Act enhancements based on FinCEN guidance.
Strategic opportunities are plentiful, as well: Leverage preemption for multi-state scaling and advise on DeFi audits to claim exemptions, potentially reducing costs based on industry forecasts.
However, risks must also be balanced. Even post-Jarkesy, enforcement actions may face increased judicial review, but excessive Senate amendments could hinder U.S. competitiveness compared to the EU’s Markets in Crypto-Assets Regulation harmonization.
CLARITY’s functional approach, which emphasizes network decentralization over the efforts of issuers, signals a move towards the maturation of cryptocurrency from a complex regulatory landscape to a structured asset class. As Senate negotiations progress, this act could mirror the Glass-Steagall Act for traditional finance by establishing lasting digital safeguards, requiring practitioners to adapt quickly to secure their clients’ positions 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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