a16z Crypto: Opposing the CLARITY Act, why could it leave greater risks?

Author: Miles Jennings, Head of Policy and General Counsel at a16z Crypto

Compiled by: Jiahua, ChainCatcher

FTX, operated by Sam Bankman-Fried, is headquartered in the Bahamas. It has been nearly four years since this cryptocurrency exchange filed for bankruptcy.

During this time, the U.S. Congress held hearings, the Department of Justice secured a guilty verdict in the case of misappropriating customer funds, and creditors have recovered nearly $10 billion.

However, Congress has yet to establish institutional safeguards that could prevent or curb such fraud at an earlier stage.

Congress has not been without attempts. The House of Representatives passed a market structure bill twice, which could have empowered regulators to stop FTX. The most recent instance was in July 2025, when the bill passed with bipartisan support, 294 votes to 134.

The Senate Banking Committee and Agriculture Committee also passed their respective versions of the Digital Asset Market Clarity Act earlier this year, and the bill is set to enter the Senate floor for consideration for the first time. Senate version bill text

Tomorrow, on September 15, the Senate will vote on whether to begin debate on the bill. If the bill is ultimately passed and signed into law, exchanges serving American consumers will have to implement the safeguards that FTX lacked at the time. If the bill fails to pass, these gaps will remain.

The issue with FTX is not that regulators failed to see through a complex scam, as it was not complex at all.

FTX exploited the regulatory void at the time, which lacked independent custody, customer asset segregation, and information disclosure requirements, to conceal the misappropriation of customer assets. At the same time, there were no regulators overseeing whether these measures were actually implemented.

It was only when the fraud was exposed and customers attempted to withdraw funds that a funding gap of up to $8 billion surfaced, leading to FTX's collapse.

What the CLARITY Act Aims to Address

Such protective mechanisms have existed for nearly a century but have never covered the spot market for digital assets.

In 1936, the Commodity Exchange Act required futures commission merchants to segregate customer property. Securities brokers must comply with custody, reserve, capital, information disclosure, and regulatory inspection requirements as long as they hold customer assets, which also includes the SEC's Customer Protection Rule.

In 1970, the Securities Investor Protection Act provided an additional protective framework in the event of broker-dealer bankruptcies.

These are not novel mechanisms but standard rules already adopted by well-regulated financial markets.

This means that the complaints from various parties in Washington over the years are not a neutral state. The question is no longer whether the digital asset market will exist, but what rules should govern this market.

The CLARITY Act brings digital commodity brokers, dealers, and exchanges under regulatory oversight and introduces the unobtrusive yet effective regulatory mechanisms from traditional financial markets into the digital asset space, including customer property segregation, qualified custody, restrictions on related-party conflicts of interest, mandatory information disclosure, listing standards, restrictions on insider sales, and the designation of a dedicated compliance officer responsible for ensuring legal compliance.

The bill will also clarify the jurisdictional issues between the SEC and the Commodity Futures Trading Commission (CFTC). Currently, this issue leaves too broad an interpretation that could even be used as a weapon for enforcement.

The bill will no longer accept projects' unilateral claims of being "sufficiently decentralized" but will use a statutory standard centered on "control" to make judgments.

At the same time, the bill requires issuers to fulfill disclosure obligations and sets lock-up periods and insider trading restrictions, similar to the current rules for listed stocks.

In short, the digital asset market and its intermediaries will need to comply with rules similar to those in traditional markets and their intermediaries.

Three Reasons for Opposition, None Sufficient to Delay Legislation

There are three objections that have prevented the CLARITY Act from entering the Senate floor for consideration:

First, it is believed that the bill would "loosen crypto regulation"; second, there are concerns that officials holding crypto assets would benefit from it; third, there are worries that stablecoin rewards would siphon off bank deposits.

Each concern deserves serious discussion, but none is sufficient to justify maintaining the status quo.

First, some believe that the CLARITY Act represents "loosened regulation" that would allow the crypto industry to spiral out of control.

This view is based on a false premise: that all crypto assets are currently subject to securities law.

This is not the case, and courts have made this clear multiple times. The coverage of securities law over digital assets is not well-defined, and many digital assets, such as Bitcoin and Ethereum, are not securities, a point that is hardly disputed.

The CLARITY Act aims to address two untenable extremes: that everything on-chain is a security, or that nothing on-chain is a security.

Neither of these statements has ever been true, and the failure to resolve the issue has come at the cost of consumers. The "wild west" that opponents fear is precisely the current state of affairs.

The lack of clear rules is also one reason why FTX was able to masquerade as a legitimate business.

An offshore exchange with no substantive disclosure obligations could directly compete with domestic U.S. companies, which not only have to comply with various state regulations but also face issues of uncertain asset classification and fluctuating enforcement standards. This is not a market; it punishes those who follow the rules.

Second, some are concerned that officials holding crypto assets would benefit from it.

This concern is valid. Public officials should not profit from the industries they regulate.

But this is a matter of government ethics, applicable not only to crypto assets but to all assets that officials may hold. Whether a market worth trillions of dollars should be subject to federal rules is a financial regulatory issue.

Mixing these two issues together does not solve the conflict of interest problem for officials; instead, it would leave millions of market participants unprotected.

This issue is not unique to the crypto industry. Officials can buy and sell stocks, hold real estate, and own equity in private companies. Conflict of interest rules should not vary based on asset class.

Creating ethical rules for each asset will only turn into a game of "whack-a-mole": anyone with self-serving intentions can find another path to circumvent the rules.

If Congress believes that existing rules are insufficient, the correct approach is to strengthen rules uniformly across all assets, rather than allowing a market structure bill to be hijacked by additional clauses. Such clauses only concern one type of asset while leaving all others outside regulatory oversight.

Under the current proposal, the CLARITY Act actually introduces unprecedented restrictions.

Rejecting the bill does not limit anyone's asset holdings; rather, it means these holdings continue to go unregulated. The bill will require token issuers to comply with disclosure obligations, lock-up periods, and insider sale restrictions that have long been applicable to publicly traded stocks.

Currently, none of these constraints exist. The "opaque, rule-less" market described by opponents is precisely the status quo they are voting to preserve.

Third, some believe that stablecoin rewards will siphon off bank deposits.

Banks argue that paying interest-like returns on stablecoin balances would create unregulated savings accounts and siphon off funds that could otherwise be used for lending to households and small businesses.

This objection lacks supporting evidence. But even if it were valid, the related concerns have already been incorporated into the bill's provisions.

After months of negotiation, the bill text explicitly prohibits passive income, including any returns that are economically equivalent to deposit interest, while allowing rewards tied to real activities.

The latest draft also allows the Treasury to impose further restrictions if there is evidence of deposit outflows.

However, the real focus of this debate is not deposits.

The White House Council of Economic Advisers estimates that if such returns were completely banned, the impact on bank lending would be about $2.1 billion, which is only about 0.02% of total bank loans.

This is essentially an anti-competitive argument disguised as a concern for financial stability.

If any version of the CLARITY Act ultimately reaches the President for signature, it will inevitably be a compromise, as legislation is inherently a compromise.

The Market Has Grown, Regulation Cannot Continue to Lag

The crypto industry needs to trade the inclusion under U.S. regulatory oversight for a clear legal foundation and rules. No matter how you look at it, this is clearly better than maintaining the status quo.

Regulatory agencies cannot solve this problem alone.

Any rules set by a regulatory agency could be overturned by the next administration; as long as someone has standing to sue, that rule could be dragged into protracted litigation, taking years to truly implement.

We have just witnessed how a change in government can alter the legal landscape for the entire industry.

Companies managing other people's funds should not build their compliance systems on a regulatory framework that may not last until the next major election. Under such conditions, institutions would also be unwilling to invest in critical infrastructure.

The certainty that the market needs can only be provided by codified law.

If legislation continues to be delayed, the next failure will be even larger.

When FTX collapsed, the crypto market was primarily composed of retail participants, existing at the fringes of the financial system. This is no longer the case.

In July 2025, Congress passed the GENIUS Act, establishing a federal regulatory framework for dollar-denominated stablecoins. Since then, the supply of stablecoins has exceeded $300 billion, trading volumes have surged, and stablecoin issuers have become one of the largest holders of U.S. Treasury securities.

However, the GENIUS Act only governs on-chain dollars and does not regulate the blockchain infrastructure that facilitates the flow of these dollars.

Other on-chain businesses are also rapidly developing. The market capitalization of tokenized assets has exceeded $30 billion, and the scope of application is expanding from native crypto products to more traditional assets.

The Depository Trust & Clearing Corporation (DTCC) holds over $114 trillion in securities through its depository subsidiary. DTCC completed the first official trades of tokenized assets in July and will launch a complete asset tokenization service next month.

BlackRock, Fidelity, Franklin Templeton, and Goldman Sachs are all operating digital asset businesses and publicly support the bill.

Bipartisan negotiators have completed the most challenging work. The Senate should finish this task.

For every week that rules remain absent, exchanges can continue to hold Americans' assets without having to adopt the protective measures that are already widely used in other regulated markets.