The cryptocurrency sector has for years called for regulatory clarity around digital asset markets in the U.S.
The resulting piece of legislation, the Clarity Act, however, has morphed into something more than just a crypto market structure bill. Over successive rewrites, the Clarity Act moved far beyond its original remit of defining whether a token is a security or a commodity under the purview of the Securities and Exchange Commission (SEC) or the Commodities Future Trading Commission (CFTC).
And the landmark bill, in its latest form, is coming up for a Senate vote on Tuesday (Sept. 15).
“After a year of intense daily bipartisan negotiations, this bill is ready,” said Senate Banking Digital Assets Subcommittee Chair Cynthia Lummis (R-Wyo.) in a Monday (Sept. 14) statement.
The Senate Republicans’ new Clarity Act proposal is designed to define when stablecoins begin competing with bank deposits, when software developers become financial intermediaries, when crypto holdings create conflicts for public officials, and when prediction markets collide with state and Tribal gaming authority.
Cryptocurrency advocates spent much of the past decade asking regulators to determine where crypto fit within the financial system. The latest beltway negotiations suggest the industry has advanced far enough that Congress now faces the opposite problem.
Where does the existing financial system need protection, accommodation or modification as crypto moves inside it?
Read more: Two Years Ago vs Today: Looking at Crypto Regulation in the US
Stablecoins Have Become a Banking Question
The PYMNTS Intelligence and Citi report “Chain Reaction: Regulatory Clarity as the Catalyst for Blockchain Adoption” found that blockchain’s next leap will be shaped by regulation, and that that evolving guidance is beginning to create the foundations for safe, scalable blockchain adoption.
The latest Clarity Act legislation being passed around by lawmakers includes a mechanism allowing federal regulators to respond if stablecoins begin causing widespread deposit flight from community banks. The provision effectively creates a circuit breaker around stablecoin rewards, with the Treasury secretary playing a central role in determining whether intervention is warranted.
Instead of regulating stablecoins exclusively according to what they are, lawmakers are contemplating regulation based on what stablecoins do to the financial system. After all, the dividing line between a payments product and a deposit competitor may ultimately matter more to banks than the dividing line between crypto and traditional finance. And if stablecoins become increasingly embedded in corporate treasury, payments and settlement, regulators may find themselves watching flows rather than labels.
See also: Crypto’s Big Senate Win Leaves Banks With Bigger Worries
Crypto Ethics Is Becoming Market Structure
An equally revealing fight concerns government ethics and how policymakers can be relied on to effectively oversee markets in which they may themselves have material financial exposure. President Trump and members of his family have disclosed involvement in digital-asset ventures, including World Liberty Financial, making questions about policymakers’ crypto holdings particularly salient as Washington writes legislation capable of affecting the industry’s economics.
“President Trump voluntarily agreed to unprecedented ethics restrictions, holding every federally elected official, judge, and their spouses to some of the toughest ethics restrictions in U.S. history. This text is truly bipartisan and includes more than 120 of Democrats’ demands,” Sen. Lummis said in her statement announcing the updated Clarity Act text.
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The revised legislation incorporates much of a bipartisan proposal associated with Sens. Thom Tillis (R-S.C.) and Ruben Gallego (D-Ariz.) addressing significant crypto-related financial interests held by senior government officials. The framework includes mechanisms involving divestment or qualified blind trusts and provides a potential enforcement role for state attorneys general. A recent Politico report flagged how crypto support is becoming a liability for Democrats.
Read more: How the SEC Went From Crypto Enforcement to Building an On-Chain Wall Street
Prediction Markets Reveal the Limits of Regulatory Clarity
Then there are prediction markets, where crypto market structure runs directly into another regulatory architecture. The revised proposal tightens language around digital commodity exchanges and conflicts involving affiliated trading while clarifying that protections for blockchain developers do not create exemptions from derivatives law or determine the regulatory treatment of prediction markets.
Indian Gaming Association Chairman David Z. Bean this summer argued that the Clarity Act, as written, fails to adequately address concerns about the relationship between federally regulated prediction markets, state gaming laws and Tribal sovereignty.
The dispute highlights a problem Congress will encounter repeatedly as financial products become programmable. The same economic activity can increasingly fall within several regulatory frames.
That makes prediction markets more than a niche dispute attached to crypto legislation. They are an early example of what happens when digitally native financial products cross legal boundaries constructed for industries that historically operated separately.
Crypto’s Next Regulatory Era Is About Collision
The first generation of crypto regulation was largely concerned with classification: What is this asset, and which regulator gets it?
The next generation increasingly looks concerned with consequences: What happens to deposits, competition, consumer protection, enforcement and existing regulatory regimes when digital assets begin performing the same economic functions as conventional financial products?
That is a much harder problem to solve with a single market-structure bill. And it may explain why Washington’s effort to bring “clarity” to crypto keeps uncovering new regulatory gray areas instead.
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