In the early hours of Tuesday, the Senate Banking Committee released the draft of the crypto market structure bill also called the CLARITY Act. The legislation, with a 309-page draft, aims to shape-up the U.S. digital asset landscape. Later this week, the senate committee will be organizing a markup session for the bill which will revolve around discussing if any further amendments need to be introduced.
Here we take a look at the key legislative pillars and regulatory shifts that define the CLARITY Act’s vision for a digital economy:
Asset classification: The CLARITY Act has classified Bitcoin and Ether as non-securities. This exempts these cryptocurrencies from the stern oversight from the SEC’s jurisdiction which calls for strict requirements around reporting and accounting. Essentially, the bill now gives other cryptocurrencies legal ways to pivot from their securities categorization into commodities if no single entity controls over 20 percent of the networks.
Stablecoin yields: The CLARITY Act has cleared out how stablecoin users could earn yields on their holdings, without pitting them as a direct competition to banks. Crypto platforms and stablecoin issuers have been banned from generating interests on merely holding these fiat and gold-pegged digital assets. Yields, could however, be generated if stablecoin holders are participating in activities like making crypto-based purchases, participating in loyalty programs, or providing liquidity to DeFi protocols. This clause is intended to keep stablecoins as a functional transactional tool and not just a savings tool.
Banking integration: The proposed bill grants traditional banks the approval to offer custody and market-making services. To offer these services, the banks would not require a prior regulatory approvals. The aim of this provision is to cut the threat of “de-banking” and let them treat crypto services as incidental to traditional banking. In legal terms, the provision wishes to inform the U.S. nationals that banks, by getting involved in digital asset services, are not getting into a weird business but are only modernizing what they have been offering with traditional assets.
Staking protection: The CLARITY Act has divided crypto staking into four categories — self-staking, liquid staking, custodial staking, and third-party node operations. The staking activity has been labelled as “administrative” or “ministerial” which ensures that those involved in this work are seen as technicians and not investment managers.
Developer protection: Web3 developers, node operators, and wallet service providers who do not control customer funds will not be treated as “money transmitters” as per the crypto market structure bill. Up until now, the authorities could have argued that if a developer wrote the code for a decentralized exchange (DEX), they were enabling the movement of money. This would have required developers and node operators to need a license.
Self-custody rights: The proposed legislation gives crypto investors the right to maintain self-custodial wallets. This would essentially prevent the government authorities or centralized platforms to force investors to maintain the custody of their assets under their supervision. This makes for another win for the decentralized ecosystem.
Modernized recordkeeping: The CLARITY Act has updated the Bank Secrecy Act (BSA) to add digital assets to the definition of monetary instruments.This will give these assets a status similar to gold or cash. It mandates complete AML and KYC checks for centralized gateways and stablecoin issuers for mandatory surveillance – excluding anonymous secondary-market data and non-custodial software interactions from oversight.
Tokenization of securities: The CLARITY Act provides a route on how traditional stocks and bonds to be issued as digital tokens on blockchain networks. This will help Wall Street banks accelerate their process to make a major on-chain pivot.
Stablecoin reserves standards: All stablecoin issuers will have to maintain 1:1 ratio with truly liquid assets, most preferably cash. This would ban algorithmic stablecoins like Terra/UST – which have resulted in collapses and market crashes in the past – completely banned in the States.
While these are among key offerings that the CLARITY Act proposes to bring to the table, the CLARITY Act does not include any clause preventing federal officers and people in political authorities from issuing cryptocurrencies and stablecoins. Senator Elizabeth Warren from the Democratic party, for one, has called out the lack of this provision.
“In just one year in office, the President and his family have raked in at least $1.4 billion in gains from crypto deals alone, and yet this bill stunningly includes zero provisions to prevent that,” Warren has said in her feedback on the proposed bill.
The topic is expected to surface at the upcoming markup session on Thursday.
Meanwhile, the Senate Banking Committee maintains that, “The CLARITY Act replaces uncertainty with clear rules of the road. It protects investors, strengthens national security, preserves lawful innovation, and gives regulators and law enforcement the tools to go after fraud, manipulation, sanctions evasion, and illicit finance.”
