I
Public domain image via U.S. National Archives
News on the regulatory front – U.S. Senators unveiled updated text of the Digital Asset Market Clarity Act (better known as the CLARITY Act) on July 22. The legislation would create a federal market-structure framework for digital assets and clarify the responsibilities of financial regulators.
The release marks another step in the legislative process. But the updated text is not final law.
For supporters of federal crypto legislation, this is evidence that negotiations are still moving forward.
That is progress – but it is not passage. Important disagreements remain, and the bill must clear several additional legislative hurdles before it can become law.
Will the CLARITY Act become law?
I have no way to know for sure. Industry groups and a number of lawmakers are pushing for the legislation to advance, arguing that clearer federal rules would reduce uncertainty and establish new standards for digital-asset businesses. Summer Mersinger, CEO of the Blockchain Association, calls the act:
“…the most important consumer protection effort in years.”
Bloomberg tells us Treasury Secretary Scott Bessent said that the CLARITY Act was at the “1-yard line” earlier this week. Goldman Sachs CEO David Solomon backs the bill, breaking with much of the Wall Street banking lobby.
Support is not universal, however. Lawmakers, banking groups, consumer advocates and crypto companies continue to disagree over several important provisions.
So, what’s the hold up?
One sticking point has been how exchanges and other intermediaries may reward customers for holding or using stablecoins.
Banking groups warn that broadly available stablecoin rewards could pull deposits from insured banks, potentially affecting their ability to lend. Crypto companies counter that an overly broad prohibition would protect banks from competition.
The latest text attempts a compromise: It would prohibit rewards on idle stablecoin balances while allowing certain rewards connected with transactions.
Reuters explains that other disagreements concern anti-money-laundering requirements, enforcement authority and the treatment of decentralized platforms.
Now, these are not minor details! They help determine which businesses would be regulated, which agencies would oversee them and what protections or obligations would apply.
Government ethics remains another source of disagreement. The updated text would temporarily restrict certain senior political officials, including the president and vice president, from issuing or sponsoring digital assets.
Some Senate Democrats argue that the provision is too narrow and that its enforcement mechanism is inadequate. That disagreement matters because the bill will need bipartisan support to advance in the Senate.
So there are still several steps between the updated Senate text and federal law. The Senate must approve a version of the CLARITY Act, differences between the Senate and House bills must be resolved – and then the resulting legislation must be signed by the president.
But there is a point worth mentioning that this draft makes clear, even if most people don’t quite realize it:
But the latest draft makes a larger shift increasingly difficult to ignore:
Much of Washington’s crypto debate has moved from whether digital assets should operate within a federal regulatory framework to what that framework should require.
With the House having passed a version of the legislation and senators now negotiating detailed rules covering regulatory jurisdiction, intermediaries, stablecoins, tokenization and decentralized finance, Congress is treating crypto market structure as a serious legislative issue.
That does not guarantee that this particular draft of the bill will become law. But it does show how far the regulatory conversation has progressed.
In other words, Congress is taking this seriously, even if it isn’t absolutely certain to become law.
So, it’s still fair to ask, if the CLARITY Act finally passes and gets put into law, what would that mean for you?
What if the CLARITY Act passes?
Supporters say the legislation would establish clearer federal requirements for centralized digital-asset platforms, brokers, dealers and custodians. Those requirements would address areas including registration, disclosure, custody, customer assets, anti-fraud controls and regulatory supervision.
Summer Mersinger, CEO of the Blockchain Association, has promoted these provisions as meaningful consumer protections. Because the Blockchain Association represents the digital-asset industry, her assessment should be understood as advocacy rather than independent analysis. (She’s clearly interested in the outcome!)
Even so, the legislation does address many of the subjects she identifies, including disclosures, anti-fraud authority, customer-property protections and the division of responsibility between federal regulators.
Clearer regulations and rules help investors understand what information a provider must disclose, how customer assets must be handled and which regulator has authority over particular activities. They should also provide additional tools for pursuing fraud or misconduct – essentially, financial regulation generally includes both the carrot and the stick.
That’s not to say that regulation is a magic bullet. No amount of regulation can make every cryptocurrency, exchange or transaction safe. Think about it this way: In 1934, the Securities and Exchange Commission (SEC) was established in response to the 1929 stock market crash – and to protect investors from stock-related fraud and manipulation.
What history shows us about the effectiveness of financial regulation
History offers some perspective. Before federal securities regulation, corporate disclosure was largely voluntary. In the late 1920s, only 43% of publicly traded companies reported gross income. Some major companies released neither a complete income statement nor a balance sheet. In this kind of environment, due diligence for investors was all but impossible.
The securities laws of the 1930s made the market more understandable and accountable by establishing standardized financial disclosures, audited reporting and penalties for misleading investors.
Researchers have found evidence that these changes improved market liquidity and made corporate disclosures more credible. When similar SEC requirements were extended to many over-the-counter companies in 1964, the most affected firms experienced abnormal gains of about 3.5% around announcements that they had begun complying – suggesting that investors placed real value on stronger disclosure and oversight.
What I’m trying to explain is that regulation will not prevent market losses. It won’t eliminate business failures. Regulation can’t guarantee that every bad actor will be prevented from taking advantage of investors before they’re harmed.
Investment risk cannot be eliminated – regulation cannot do that. What well-designed regulation can do is make those risks more transparent to investors. Regulatory agencies like the SEC, the Commodity Futures Trading Commission (CFTC), the Financial Industry Regulatory Authorities (FINRA), the National Futures Association (NFA) and others have one job.
They level the playing field. And they create frameworks that allow investors to evaluate assets, that require companies to disclose risks. To fight illegal manipulation and prosecute bad actors. Regulations and agencies like these don’t eliminate risk.
They help make risks more transparent. That’s important, because it’s often the risks investors cannot see that trip them up.
Accepting more risk does not guarantee a higher return. There are almost no guarantees in investing. Even so, we should remember that, in investing, risk and reward are joined at the hip. There are no higher returns without higher risks.
As much as regulation may reduce certain “invisible” risks (legal, operational or market-conduct), it cannot eliminate the investment risk associated with the assets themselves.
That’s still important. That lets investors focus on the visible risks when performing their due diligence on an asset or asset class.
That is why regulatory clarity should be treated as one consideration – an important one! – rather than a substitute for due diligence.
Anyone evaluating crypto should consider the specific assets involved, their volatility, fees, custody arrangements, liquidity needs, time horizon and capacity for loss. A long-term perspective may discourage impulsive decisions, but it does not guarantee that an investment will produce a positive return.
Regulatory developments are worth watching, but they are only one factor in deciding whether crypto belongs in your savings. Investors should also consider their goals, time horizon, risk tolerance, existing holdings and capacity for loss. To learn more about this, check out the Top 5 Crypto Mistakes Beginners Make.
Those who want to learn more about diversifying long-term savings with a Digital IRA can download our free Crypto IRA Guide. It explains the benefits of a Digital IRA, and some of the questions to consider before deciding whether crypto is right for your retirement plan. Alternately, if you’ve completed your due diligence and are ready to diversify your savings with the future of money, you can open a Digital IRA with BitIRA right now (anytime, day or night) in less than 10 minutes.
