CLARITY Act Leaves DeFi Rules Blank - A Ticking Time Bomb for Retail Protection

Washington's latest crypto legislation just punted the hardest question back to regulators—and everyday investors could pay the price.

The Regulatory Gap

Lawmakers explicitly left decentralized finance frameworks empty in the CLARITY Act's final text. No custody rules, no trading standards, no clear compliance pathways for protocols operating without intermediaries. That deliberate omission creates a regulatory vacuum where existing investor protections simply don't apply.

Negotiation Deadline Looms

Agency heads now face an impossible timeline to draft comprehensive DeFi rules before the act's implementation date. Multiple congressional aides confirm the working groups remain divided on fundamental questions: How do you regulate code? Who's liable when there's no company?

The Collapse Scenario

If negotiations fail—and insiders give that outcome 50/50 odds—the entire retail protection framework collapses for decentralized platforms. No disclosure requirements, no fraud prevention, no recourse for stolen funds. One banking committee staffer called it "the financial equivalent of removing seatbelts and airbags because we can't agree on crash test standards."

Meanwhile, traditional finance executives will likely shrug and charge their usual consultation fees to 'explain' the coming chaos—proving some business models thrive on regulatory uncertainty.

The clock's ticking, the rules are blank, and Main Street's crypto holdings just entered the danger zone.

The split and what's still moving

CLARITY's core move divides crypto into three buckets.

“Digital commodities” are tokens tied to blockchain systems, such as payments, governance, and network incentives, excluding securities and stablecoins.

“Investment contract assets” are digital commodities sold for capital-raising. They start as securities under SEC jurisdiction at issuance, then lose security status in secondary trading and flip to CFTC oversight.

“Permitted payment stablecoins” are national-currency tokens issued by supervised entities that tie into the GENIUS framework.

That hands the CFTC exclusive jurisdiction over digital commodity spot markets, beyond its current anti-fraud remit. The SEC keeps authority over issuers and offerings of investment contract assets.

Meanwhile, banking regulators supervise stablecoin issuers. The lines on the field are inked, but some markings are still in pencil.

“Security” itself sits in bracketed language in Senate text. The Senate Agriculture draft leaves entire DeFi sections bracketed and labeled “seeking further feedback,” because no one has agreed on what counts as “decentralized” enough to age out of securities status.

Plumbing that doesn't exist yet

CLARITY creates an entire cast of new registered entities. Digital commodity exchanges must meet Core principles around listing standards, surveillance, system safeguards, capital, and reporting.

They can only list tokens where issuers meet disclosure requirements, including source code.

Digital commodity brokers and dealers need CFTC registration, capital standards, recordkeeping, and retail customer protections.

Qualified digital asset custodians hold customer digital assets for registered firms under the supervision of the banking regulator, the SEC, or the CFTC.

DeFi carve-outs exclude non-custodial activities, such as running nodes, validating, and building wallets, from regulated intermediary status, though anti-fraud powers still apply.

Senate Agriculture leaves those sections bracketed because the trade-off is unresolved: making it too broad risks a retail protection collapse, but making it too narrow risks moving protocol offshore.

Custody is where the bill bites. CLARITY forces exchanges and brokers to hold customer digital assets with qualified custodians and segregate customer property.

The draft directs regulators to modernize recordkeeping so blockchain can serve as books and records. It bars regulators from forcing banks to treat customer crypto as balance-sheet assets or to hold extra capital beyond operational risk.

The statutory text punts most of the real detail into future custodial standards, disclosure templates, and unwritten listing rules.

Additionally, the bill gives regulators 360 days from enactment to write most rules, with some provisions stretching to 18 months in Senate drafts. That means years of hybrid status where today's market plumbing coexists with partially implemented US law.

Politics haven't settled

The markup is taking place amid a disputed backdrop. Democrats are uneasy about Trump's control over independent agencies, especially if the Supreme Court lets presidents fire SEC and CFTC commissioners at will.

Legal analysis noted that the investment contract carve-out could enable regulatory arbitrage, shifting oversight away from the SEC post-fundraising and leaving a historically underfunded CFTC to police retail spot trading.

Before anything changes on an exchange screen, Banking and Agriculture merge their drafts. Both committees get through markups, where Democrats will push for tighter retail protections and limits on presidential control.

Leadership finds 60 votes on the Senate floor, not a glide path in a divided chamber.

The House and Senate reconcile their versions in conference or through direct acceptance. The President signs it, and appropriators fund a much larger CFTC footprint that former officials say the agency can't handle without significantly more money and staff.

Regulators write the rules over 360 days to 18 months. Firms transition into provisional status while rules finalize.

The courts weigh in, because Supreme Court doctrine on agency power means key rulemakings around token classification and DeFi treatment will face litigation.

David Sacks can look forward to finishing the job in January, but from the market's view, January is the beginning of a multi-year pipeline before anything becomes binding. The hard part hasn't started.