Digital Asset Update: CLARITY Act Takes Another Step Forward

The Digital Asset Market Clarity Act (H.R. 3633) (the CLARITY Act) took another important step forward on 8 August, when Senate Majority Leader John Thune filed a cloture motion on the motion to proceed to consideration of the legislation. Cloture is the Senate procedure for ending debate and moving toward a vote on legislation; for most legislation, invoking cloture requires 60 votes. The filing sets up a 15 September vote on cloture on the motion to proceed and provides a path toward Senate consideration following the August recess.

The development is significant, particularly given the challenges of assembling sufficient bipartisan support for comprehensive digital asset legislation. The House previously passed its version of the CLARITY Act with substantial bipartisan support, by a vote of 294–134, but the Senate has been negotiating its own approach to several of the legislation’s key provisions.

The filing of the cloture motion should therefore be viewed as a meaningful step forward—but not as an indication that the legislation is on a certain path to enactment. The Senate must still navigate the 60-vote threshold for cloture, and negotiations remain focused on several substantive issues that could materially affect the scope and operation of the final legislation. We highlight the pertinent issues—and their status—below.

Key Issues Under Discussion

Defining the SEC-CFTC Regulatory Boundary

At the center of the CLARITY Act is an effort to establish a clearer division of responsibility for digital asset regulation between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). The legislation generally seeks to establish a framework under which certain digital assets would be treated as digital commodities subject primarily to CFTC oversight, while preserving SEC jurisdiction over digital assets that meet the applicable definition of securities.

This allocation of jurisdiction is consequential for issuers, trading platforms, intermediaries, and other market participants. It provides a more predictable regulatory framework for determining which agency’s registration, disclosure, market, and enforcement requirements apply to a particular activity.

At the same time, drawing the line between securities and digital commodities raises difficult questions regarding the characteristics of a digital asset, the circumstances under which an asset becomes sufficiently decentralized, and the treatment of the investment contract through which an asset may initially be offered. How those provisions ultimately are drafted will have significant implications for existing digital asset businesses and projects.

Stablecoin Rewards and Yield

Stablecoin-related provisions have also emerged as an important area of discussion. In particular, policymakers have been considering how the market-structure legislation should treat rewards or returns associated with holding or using payment stablecoins.

The distinction between rewards tied to actual activity and returns that resemble passive investment income has important implications for stablecoin issuers; financial institutions, including larger and community banks; exchanges; and other market participants. The Senate discussions have included approaches that would permit certain activity-based incentives while limiting arrangements that could cause stablecoins to function more like interest-bearing investment products.

The final treatment of stablecoin rewards could therefore have implications well beyond the market-structure framework itself, particularly for the economics of stablecoin distribution and the competitive relationship between traditional financial products and digital asset products. 

Banking, Custody, and Access to Financial Services

Another significant issue is the treatment of banks and other regulated financial institutions that provide custody and related services for digital assets.

The legislation includes provisions intended to address the regulatory treatment of customer digital assets held by financial institutions, including questions concerning capital and balance-sheet treatment. The House-passed legislation, for example, would limit certain requirements that could cause customer assets held in custody to be treated as liabilities of the institution or require additional capital against those assets, subject to specified exceptions.

These provisions are important because the ability of banks and other established financial institutions to provide custody, brokerage, and related services could materially affect institutional adoption of digital assets. Greater certainty in this area could help facilitate broader participation by regulated financial institutions, while the precise safeguards adopted will remain an important consideration for policymakers.

Market Access and Registration

The legislation also seeks to establish registration and compliance pathways for digital commodity exchanges, brokers, and dealers. Among other things, the House-passed bill contemplates expedited or provisional registration mechanisms and addresses the interaction between SEC- and CFTC-registered entities.

For existing digital asset businesses, these provisions could be among the most consequential aspects of the legislation. A workable transition framework could allow businesses that have been operating under regulatory uncertainty to move into a defined federal regime without having to rebuild their businesses from the ground up. Conversely, overly prescriptive requirements could increase compliance costs or limit the ability of smaller or innovative businesses to participate.

DeFi, Developers, and Network Participants

The treatment of decentralized finance (DeFi) is another important issue. The legislation contemplates protections or exclusions for certain activities associated with the development, operation, and maintenance of blockchain networks, including activities that may be performed by developers, validators, wallet providers, and other network participants.

The policy challenge is determining where to draw the line between genuinely technological or decentralized activities and activities that constitute regulated financial services. The distinction is particularly important because developers and other participants may contribute to a protocol without exercising traditional forms of managerial or financial control or taking custody of customer assets.

The Senate’s approach to these provisions could determine the extent to which developers and other infrastructure providers can participate in blockchain networks without becoming subject to registration requirements designed for centralized financial intermediaries. It also could affect the degree to which regulators retain authority over fraud, manipulation, and other conduct, even where an activity otherwise falls within a statutory exclusion. The House-passed legislation, for example, provides an exclusion for certain DeFi activities while preserving SEC anti-fraud and anti-manipulation authority.

Ethics and Other Policy Considerations

The negotiations also have extended beyond traditional market-structure questions. Ethics provisions relating to federal officials and digital asset interests have become part of the broader Senate negotiations and have contributed to the difficulty of assembling the votes necessary to move the legislation forward. 

These issues illustrate the broader challenge facing the legislation: Securing bipartisan support requires agreement not only on the regulatory architecture for digital assets but also on related questions concerning consumer protection, conflicts of interest, financial stability, and the appropriate scope of federal oversight.

A Meaningful Step Toward Regulatory Clarity

Despite these remaining questions, the 8 August cloture filing provides reason for measured optimism. 

For years, digital asset businesses and traditional financial institutions seeking to enter the digital asset market have operated against a backdrop of regulatory uncertainty. The CLARITY Act represents an effort to replace that uncertainty with a statutory framework that would more clearly define regulatory jurisdiction, establish registration pathways, and provide rules tailored to the technological characteristics of digital assets.

Importantly, the Senate’s continued work on the legislation suggests that the debate has moved beyond whether Congress should address digital asset market structure to the more difficult question of how that framework should be constructed. 

The remaining negotiations are likely to determine how broadly the legislation reaches, how regulatory responsibilities are allocated between the SEC and CFTC, and how the framework applies to emerging areas such as DeFi, stablecoins, custody, and blockchain infrastructure. Those questions are significant, but they also present an opportunity to develop a framework that can accommodate innovation while maintaining appropriate investor and consumer protections.

Looking Ahead

The filing of the cloture motion does not eliminate the legislative uncertainty surrounding the CLARITY Act. The Senate must still demonstrate sufficient support to overcome the procedural hurdles to floor consideration, and the legislation could undergo further changes as senators seek to resolve outstanding policy questions.

Nevertheless, the latest development keeps the legislation moving and provides a basis for cautious optimism. If lawmakers can continue to build on the bipartisan support that has characterized portions of the market-structure debate, the CLARITY Act could ultimately provide the clearer regulatory foundation that digital asset businesses, financial institutions, and investors have sought.

For market participants, the immediate focus should be on the Senate’s next steps following the August recess and, in particular, how senators address the remaining questions concerning regulatory jurisdiction, DeFi, stablecoin rewards, banking and custody, market access, and related policy provisions. The resolution of those issues will provide a clearer indication of whether Congress can translate the current momentum into legislation that meaningfully levels the regulatory playing field for digital assets in the United States.

How the Firm Can Help

As the CLARITY Act moves toward Senate consideration, digital asset businesses, financial institutions, prediction markets, and other market participants should consider how the proposed framework could affect their existing activities, business models, and regulatory strategies. The issues under discussion—from the SEC-CFTC jurisdictional boundary and DeFi activities to stablecoin rewards, custody, and registration—could have significant implications across the digital asset ecosystem.

The Firm's multidisciplinary Digital Assets and Blockchain Technology practice group team is closely monitoring the legislation and the evolving regulatory landscape. We provide experience from the highest levels of government, including former members of the President of the United States’ Council of Advisors for Digital Assets, senior advisors to congressional leadership and the respective committee chairs, the US Department of Justice, the SEC, and the CFTC. We work with clients to assess the potential impact of legislative and regulatory developments, identify emerging business opportunities and risks, address tax considerations relating to digital assets, and help clients successfully prepare for changes to the legal and regulatory framework. Please contact a member of our digital assets team to discuss how the CLARITY Act and related developments may affect your organization.