The Digital Asset Market Clarity Act includes provisions that could regulate decentralized finance (DeFi) platforms more strictly. Recent changes may expand the definition of who is considered to have control over these platforms, raising concerns in the DeFi sector.
Key points
Digital Asset Market Clarity Act includes DeFi regulations
Changes may classify developers as securities intermediaries
Regulators could label many DeFi protocols as centrally controlled
Blockchain Regulatory Certainty Act protections were retained
One section in the crypto industry's all-important U.S. Senate bill — the Digital Asset Market Clarity Act — outlines how to treat trading platforms that claim a place in decentralized finance (DeFi) but aren't genuinely decentralized. It gives U.S. regulators a path to saddle them with rules, but after a tweak last week, it could be expanded in a way that is alarming the DeFi sector.
A dramatic, rushed strategy to win Democratic votes during the Clarity Act's hearing in the Senate Banking Committee worked out as the bill's advocates hoped. Two Democrats came over and made the advancement of the legislation narrowly bipartisan. As a result, the legislative action that one high-profile Clarity advocate, Republican Senator Cynthia Lummis, called a "historic step forward" for the industry may come with a price that involves that DeFi section.
The lawmakers sliced away earlier Clarity Act language that protected what are known as non-controlling blockchain developers — the people who create software behind things like legitimately decentralized platforms and personal crypto wallets but have no hand in their operations. Under the version that is now emerging from the committee, those people could be folded into financial regulations as "securities intermediaries" if the government can argue they actually have some level of control that would jeopardize claims their projects are decentralized.
The ability for the federal watchdogs to designate their protocols as fake DeFi and regulate them as centrally controlled entities is arguably much wider, even if they don't really wield the kind of control that would seem to clearly trigger the label. As now written, it could suck in anybody who is "acting pursuant to an agreement, arrangement, or understanding" to control the protocol.
The DeFi sector did celebrate the important news that its main protection for developers — the Blockchain Regulatory Certainty Act that generally shields software developers who don't control people's money from being treated as money transmitters — survived the negotiation.
"I have been clear that preserving the Blockchain Regulatory Certainty Act in the bill is a top priority, and we accomplished that in Thursday's markup," Senator Lummis said in a Monday statement to CoinDesk, though her office didn't address the revision from one of Lummis' own amendments that's worrying the industry. "I will continue to work with stakeholders to ensure that we get this legislation to the president's desk and ensure the U.S. leads on digital asset innovation."
Q&A
What does the Digital Asset Market Clarity Act propose for DeFi platforms?
The Act outlines how to treat trading platforms in DeFi, potentially subjecting them to regulatory rules if they are deemed not genuinely decentralized.
How could the Clarity Act affect non-controlling blockchain developers?
The Act's revised language may classify non-controlling blockchain developers as 'securities intermediaries,' subjecting them to financial regulations if they are perceived to have any control over their projects.
What are the implications of the Clarity Act for the DeFi sector?
The implications include a broader regulatory scope that could label many DeFi protocols as centrally controlled, impacting their operational freedom and compliance requirements.
What protections for developers were retained in the Clarity Act?
The Act preserved the Blockchain Regulatory Certainty Act, which protects developers who do not control users' funds from being classified as money transmitters.
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Emerging threat
While the BRCA was defended and DeFi advocates were as happy as the rest of the crypto world that the bill is now benefiting from bipartisan momentum, this other threat rose up as a last-minute, behind-the-scenes dash for compromise even as lawmakers plodded through their other business on the Clarity Act.
It gives federal regulators such as the Securities and Exchange Commission more leeway to deploy securities oversight, which may not loom as heavily under the crypto-friendly regulators currently in the agency seats, but might come to be viewed differently under future management.
One insider who asked not to be named suggested that acting by "arrangement" or "understanding" could be interpreted in such a way that people who don't really control others' money could get tapped for regulation. People who own governance tokens, such as developers building the protocol, could have an arrangement or understanding to work together and tend to vote in cooperation with each other, and their understanding could be interpreted as a regulatory trigger, even if they don't control assets connected to the protocol.
Some DeFi advocates say they're hoping they can crack back into the bill's sections, though they're glad the long-awaited legislation is moving forward again after a long delay.
"Giving SEC and Treasury the flexibility here was clearly what certain Democrats were demanding," said Bill Hughes, senior counsel and director of global regulatory matters at Consensys. He called the change "a very nuanced edit" that would put supreme importance on the agencies' eventual writing of rules that implement the law, because that's where the language change would be translated into the actual guardrails.
Winning bipartisanship
The DeFi compromise was among the changes during last week's hearing that obtained Clarity Act support from Democratic Senators Angela Alsobrooks and Ruben Gallego, giving the bill a 15-9 win to advance out of the committee. And another Democrat, Mark Warner, indicated the changes might win his vote later on.
"We did serious work on genuinely difficult questions about regulatory jurisdiction, consumer disclosure requirements, insolvency protections, stablecoin yield, crypto ATMs and many more," Gallego said in a statement when voting yes on advancing the Clarity Act. "My vote today is so we can continue these efforts. But I want to be clear: My vote here does not guarantee a vote on the floor."
The amendment that shook up DeFi was one of a package advanced by Lummis during the Senate Banking Committee hearing. Others dealt with such things as expansion of digital assets activity to credit unions, SEC tokenization and state-level consumer protections tied to digital commodities.
And other amendments that passed during the hearing included one from Senator Mike Rounds, a South Dakota Republican, who sought a regulatory "sandbox" for financial firms to get into artificial intelligence products, adding a whole new topic to the crypto legislation that will have to be managed during the next stages as lawmakers devise a final version of Clarity.
Senator Dave McCormick also got an amendment through that would grant institutions greater leeway in the practice of calculating margin across portfolios, which Hughes said is "substantively beneficial for institutional market structure and a long-standing industry ask."
With those changes, the Clarity Act moves forward to next be merged with a similar bill that already cleared the Senate Agriculture Committee earlier. Then a final version would advance for a vote of the overall Senate. But that one will need to include a provision that somehow limits the personal involvement of senior government officials in the crypto industry — the contentious ethics provision pursued by Democrats who argue that President Donald Trump's ties to the sector are inappropriate.
So, the Clarity Act isn't done, yet, and some significant hurdles need to be jumped before the effort could be signed into law by Trump.
