Washington is gearing up to tackle one of crypto’s most enduring challenges: determining who is responsible for regulating a market where a token can behave like a commodity, be sold like a security, and function through software that doesn’t consider itself a traditional company. The Digital Asset Market Clarity Act of 2025, informally known as the CLARITY Act, has already advanced through the House. Now, Senate lawmakers are preparing for a January markup to decide whether this legislation becomes a long-lasting framework or suffers the fate of previous drafts that collapse under complexities.
For anyone trying to grasp the stakes involved, two critical provisions serve as the backbones of the CLARITY Act. First is a carve-out for a variety of decentralized finance (DeFi) operations—these activities won’t be classified as intermediaries simply for being part of the underlying blockchain technology. Second is a preemption clause that regards “digital commodities” as “covered securities,” a seemingly innocuous phrase that is actually designed to eliminate the confusing array of state regulations that have troubled crypto firms for years.
The Act’s potential is straightforward: it aims to end the ongoing jurisdictional clash between the SEC and the CFTC, clarify the conditions under which secondary trading resembles a security offering, and provide a structured path for venues that manage crypto liquidity to achieve registration. However, the risks are equally clear: the pressing issues in crypto regulation are practical ones. These involve defining what exactly falls under “DeFi” amidst a challenging landscape of interfaces, admin keys, and governance issues, as well as safeguarding investors when federal laws begin to override state regulations.
The DeFi Carve-Out
The CLARITY Act’s approach to DeFi can be summarized simply: Congress wants to prevent regulators from categorizing infrastructure as a trading exchange. The DeFi exclusion stipulates that individuals or entities shall not be subjected to the Act merely for engaging in activities that keep blockchains and DeFi protocols operational. This includes compiling and relaying transactions, operating a node, maintaining protocols, or running liquidity pools.
These actions are particularly significant as they correspond directly to the regulatory bottlenecks that have hindered DeFi development. A persistent question arises: who is considered “in the middle” of a trade? The bill endeavors to provide clarity by asserting that merely operating software does not mean one is running a regulated market.
However, there’s a crucial caveat that is not buried in the fine print. This carve-out does not eliminate anti-fraud and anti-manipulation oversight. The legislation explicitly states that these authorities remain intact, meaning the SEC and CFTC can still pursue deceptive actions, even when the accused party claims to be merely “software” or a “relayer.” This distinction raises important market-structure questions: should DeFi developers and operators be obligated to register and meet compliance requirements like traditional exchanges? Moreover, in the event of misconduct—such as a deceptive token launch or market manipulation—who exactly can regulators bring to court, and under which legal theories?
The bill attempts to narrow these inquiries while leaving open the necessary enforcement avenues for regulators. However, it creates additional complexities that senators will need to address during markup. For example, consider the phrase “providing a user-interface that enables a user to read and access data.” While this grants a safe harbor for basic interfaces, many DeFi front ends actively route orders, select default settings, and affect liquidity migration. This begs the question: where does a simple UI end, and the function of a trading venue begin? The CLARITY Act may give regulators a broad directive, but it ultimately leaves many challenging questions for future rulings.
Turning to liquidity pools, the carve-out grants permission for individuals to participate in pools for executing spot trades. While this is a broad allowance, it raises concerns in a landscape where liquidity provision can be permissionless and highly incentivized, sometimes led by an insider decision-making process. Critics argue that the Act might give DeFi too much leeway without establishing robust retail protections, such as disclosures and conflict-of-interest controls.
The bill addresses these issues elsewhere, engaging in studies and encouraging modernization proposals. However, relying solely on studies without firm regulations remains a concern. The political divide persists: senators advocating for U.S. leadership in crypto innovation view DeFi’s disintermediation as advantageous, whereas those wary of consumer risks see it as a potential avenue for evasion. Here, the DeFi carve-out embodies this philosophical clash.
The Preemption Gambit
The CLARITY Act’s move towards state law is refreshingly direct: it would categorize a “digital commodity” as a “covered security.” Covered securities are a federal category designed to limit states’ ability to impose their own registrations or requirements on certain offerings, which helps prevent fifty competing regulations from stifling a national marketplace.
This development is particularly significant because the crypto space has had to navigate a landscape where individual state requirements create chaos for compliance. This complexity has often resulted in state securities administrators imposing conditions disconnected from the SEC and CFTC’s broader regulatory guidelines.
The legislation also preserves certain existing state authorities over covered securities, a move that serves as a reminder that “preemption” isn’t absolute and complexities remain, especially in cases of fraud. This dynamic raises critical questions: is the regulated perimeter practical for the firms expected to comply? A crypto exchange might spend years negotiating federal compliance, only to face unpredictable state interpretations that affect every aspect of their operations.
The preemption clause aims to alleviate this turmoil, but it involves a trade-off. As it diminishes the authority of state regulators—much to the chagrin of consumer advocates who see state enforcement as crucial for swift action against scams—it raises the stakes around investor protection. Supporters herald a unified market with standardized rules, while critics see preemption as a strategy that weakens the safeguards for retail investors.
Furthermore, the bill’s definitions are incredibly important. The preemption relies on the classification of “digital commodities.” The CLARITY Act tries to draw a line between the investment contract used to sell tokens and the tokens themselves when they trade in secondary markets, as expressed in the committee’s summary. The intent is clear: digital commodities sold under an investment contract should not retain that designation in the secondary market.
If this classification is effectively maintained, the preemption clause could significantly streamline the regulatory framework. Conversely, if courts or regulators interpret many tokens as securities, the preemption clause may fail, becoming yet another contested topic in the ongoing regulatory struggle.
The importance of the upcoming January markup extends beyond the SEC-CFTC divide. Here, senators will determine whether to refine definitions, restrict safe harbors, and adjust the reach of preemption to ensure that consumer advocates and state regulators are adequately considered. This markup will also provide a crucial opportunity to grapple with the unresolved issues that this legislation presents.
One significant issue is defining the “DeFi” category — should it be defined by technology or its practical application? The carve-out protects essential infrastructure but might also allow sophisticated operators to obfuscate traditional intermediary roles by claiming they merely provide a user interface or code. The bill may keep anti-fraud intact, but that’s not equivalent to a comprehensive licensing regime or a stable set of operational standards.
Moreover, the timeline for seeing concrete “clarity” in the market is uncertain. The committee summary indicates that the SEC and CFTC must produce required rules within specified timeframes after the bill becomes law. However, several provisions have built-in delays tied to rulemaking, meaning enforcement ambiguities could persist while firms continue to operate within the framework that the legislation has yet to fully solidify.
The emotional stakes also count; can bipartisan support for this initiative last long enough to ensure successful passage? The House vote indicated considerable momentum, yet the history surrounding market structure negotiations shows that the closer legislation gets to enactment, the more edge cases prompt constituency-driven debates over investment protection versus innovation, state authority versus federal jurisdiction, and interagency turf wars.
At its essence, the CLARITY Act represents Congress’s attempt to replace a decade of ad-hoc responses with a coherent regulatory framework. The DeFi carve-out underscores the intent to prevent the categorization of infrastructure as intermediary activity, while the preemption clause aims to unify the regulatory landscape. Whether these efforts yield a comprehensive rulebook or give rise to new loopholes and conflicts will depend largely on the choices senators make as they refine this pivotal legislation in January.
