RESOLVING THE LEDGER
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In today’s newsletter, Aaron Brogan analyzes why the Clarity Act may be falling short of industry needs.
Then, in “Ask an Expert,” Trevor Overko weighs in on the bill’s potential implementation.
As you might have seen, the heavily contested “ethics” portion of the pending Digital Asset Market Clarity Act has had a bit of a bumpy ride. The language, that would prohibit certain federal officials, including the President, from issuing cryptocurrency tokens while in office, has long been a cornerstone of the Democratic crypto agenda.
This is a tricky issue for Republicans because in order for the crypto bill to become a law, President Trump has to sign it, and historically he has liked issuing cryptocurrency tokens. Nonetheless, they reached an agreement on proposed language and sent it to their colleagues across the aisle. Unfortunately, this was not well received, with Sen. Ruben Gallego noting “Whatever piece of s**t they sent back to us, that was not a serious effort.”
This comes as Senate Majority Leader John Thune threw in the towel and told reporters that the bill was not going to pass before September. And if you are a reader of tea leaves, that means it is dead. Congress tends to spend the autumn months of election years campaigning to keep their jobs and if Democrats win either house, as they are expected to, there will be no bill before 2029. Anything can happen, but things are not looking good for the plucky bill that couldn’t.
That may be good though after all, because much of the industry organizing to support the bill obscured the fact that it is a heap. The basic problem with Clarity is that it is meant to enable a design paradigm that doesn’t exist anymore. Now that it has finally stopped mooing, we can admit it.
Clarity would have functioned by creating a complex matryoshka of overlapping categories. It creates three nested categories. A “digital commodity” is expected to mean a fungible blockchain-based asset capable of exclusive possession and peer-to-peer transfer. A “network token” is a digital commodity intrinsically linked to a distributed-ledger system and deriving, or reasonably expected to derive, value from its use. An “ancillary asset” is a network token whose value depends on the managerial or entrepreneurial efforts of an originator or related person.
Primary sales of a network token that is not an ancillary asset generally are not securities transactions, absent disqualifying financial rights. Sales involving an ancillary asset, however, may be treated as investment-contract transactions and must satisfy the ancillary-asset disclosure regime or another registration exemption. Regulation Crypto provides a bespoke exemption subject to offering limits, disclosures and other conditions.
The problem is that Clarity’s core bargain is unattractive. A network token can escape the ancillary-asset regime only if developers relinquish coordinated control, perform no more than nominal managerial work and cease being a primary source of the token’s value, an impractical endpoint. Developers who retain control must instead provide extensive initial and semiannual disclosures under Regulation Crypto, recreating much of the burden that made Regulation A unattractive to crypto issuers.
Nor does the Clarity Act address the tax incentive to issue offshore since Regulation Crypto is limited to U.S.-organized originators and provides no special federal tax treatment for token sales. This means that the vast majority of projects that use the Cayman Islands or similar jurisdictions for token issuance tax strategy may find the new pathway commercially unusable. It’s not obvious to me that any serious venture would ever use the mechanism.
Yea, with one important caveat. The objective cannot simply be to make life easier for crypto companies. It should make legitimate projects easier to identify, while making fraud and regulatory arbitrage harder. The biggest problem in the U.S. has been that companies often cannot determine whether they are dealing with the SEC, the CFTC or both until an enforcement action happens.
That is not a serious regulatory system. It pushes responsible teams offshore while doing surprisingly little to stop bad actors. The Clarity Act is directionally right because it recognizes that a capital-raising transaction can involve securities laws without automatically making the underlying token a security.
That distinction is much closer to how decentralized networks actually develop. My main concern is implementation. If the definitions remain subjective, or the SEC and CFTC apply conflicting standards, the uncertainty simply moves from the courts into the rulemaking process. The bill should pass, but success will depend on clear rules, coordinated regulators and real enforcement against fraud.
Q. What aspect will benefit investors the most?
The greatest benefit is the combination of clearer asset classification and mandatory disclosure. Investors need to know what they are buying, which regulator has jurisdiction, what information the project must disclose and what legal protections exist if something goes wrong. The current system often gives investors the worst of both worlds. Many projects do not provide disclosures comparable to public companies, yet they also lack a practical regulatory framework tailored to decentralized networks.
Meanwhile, legitimate businesses spend years and millions of dollars debating whether their token is a security, a commodity or something else. The Clarity Act moves toward a more useful distinction between the fundraising transaction and the underlying network asset. It also introduces disclosure requirements, restrictions on insider sales, registration standards for intermediaries and protections around customer assets.
None of that removes the underlying risk of crypto. Tokens will still fail, markets will remain volatile and investors will still make bad decisions. What it does is make those risks more visi...
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