The draft CLARITY Act, poised for Senate debate, promises regulatory clarity for digital assets but has ignited fierce backlash from the crypto industry for failing to shield developers from prosecution and expanding invasive surveillance. As Coinbase CEO Brian Armstrong withdraws support, declaring “we’d rather have no bill than a bad bill,” critics argue the legislation entrenches banking interests, undermines DeFi autonomy, and leaves builders exposed to endless liability.
The CLARITY Act’s Rocky Path to Senate Markup
Introduced in May 2025 by House Financial Services Chairman French Hill, the Digital Asset Market Clarity (CLARITY) Act of 2025 aimed to carve out a sensible framework for digital assets. It passed the House overwhelmingly on July 17, 2025, by a 294-134 vote, granting the Commodity Futures Trading Commission (CFTC) exclusive jurisdiction over “digital commodity” spot markets while preserving SEC oversight for investment contracts. The bill established registration for digital commodity exchanges, brokers, and dealers, and defined key terms like “blockchain system” as publicly available source code enabling distributed ledgers with cryptographic integrity.
Yet, as the Senate Banking Committee gears up for markup on January 15, 2026, the momentum has stalled. Senate Banking Chair Tim Scott praised the House version as a “strong template” but released a discussion draft with Senator Cynthia Lummis in July 2025 for feedback. Now, high-stakes battles over stablecoin yields and ethics rules threaten to derail it entirely. A crypto lobbyist warned of a potential committee blow-up, capturing the tense atmosphere as industry heavyweights like Coinbase pivot to opposition.
Developer Protections: A Hollow Promise
At the heart of the criticism lies the bill’s so-called developer safeguards, which fall woefully short of true immunity. The draft strips away key protections against Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) liabilities, exposing builders to prosecution for users’ actions. Even “mature blockchain systems”—those with decentralized governance and public source code—fail to grant blanket exemptions, leaving creators vulnerable to enforcement actions if end-users engage in illicit activity.
Reporters highlight how these exclusions perpetuate the status quo: developers prosecuted for code that enables anonymous transactions, regardless of intent. The bill’s prohibition on evasion—making it unlawful to structure arrangements to avoid “digital commodity issuer” status—further chills innovation. Without robust liability shields, projects enhancing privacy, like zero-knowledge proofs or mixers, risk becoming legal lightning rods, stifling the very autonomy that defines crypto.
Surveillance Overreach in DeFi and Non-Custodial Wallets
The legislation’s push for Travel Rule-style requirements marks another red flag. These rules, typically imposed on custodial exchanges, would extend to decentralized finance (DeFi) protocols and distributed ledger applications. Developers could face mandates to monitor transactions, collect user data, and report suspicious activity—directly contradicting DeFi’s core ethos of permissionless access.
Non-custodial users, who control their own keys, aren’t spared either. The “Keep Your Coins Act” companion fails to block illicit finance laws from intruding on self-custody rights. New provisions could compel surveillance of wallet interactions, eroding privacy for everyday holders. Critics warn this bolsters government oversight, turning blockchain transparency against users and favoring centralized incumbents who already comply with such regimes.
Stablecoin Yield Wars: Banks vs. Crypto Innovation
A flashpoint battle rages over stablecoin yields. The bipartisan Senate compromise would allow crypto firms to offer rewards on stablecoin holdings, akin to credit card perks, countering banking lobbyists’ push to scrub these provisions. Banks, fearing competition, argue yields constitute unlicensed banking, but proponents see it as essential for user adoption.
Coinbase’s Armstrong spotlighted this in his X post, underscoring how banks’ success here would tilt the scales toward traditional finance. The related STABLE Act and GENIUS Act already regulate stablecoin issuance with reserve and redemption rules, fostering innovation for new entrants. Yet, without yield parity, the CLARITY Act risks crowning incumbents while hobbling crypto-native stablecoins like USDC or PYUSD.
State Regulators and Definitional Chaos
State authorities, via the North American Securities Administrators Association (NASAA), have voiced alarms over definitional inconsistencies. The bill’s “network token” and “digital commodity” frameworks clash with existing investment contract law, potentially weakening SEC enforcement against scams. NASAA urges preserving state anti-fraud powers, notice filings, and fees, warning that federal preemption without safeguards invites chaos.
Democrats’ ethics push—barring politicians from profiting off crypto—adds partisan friction, targeted at figures like the Trump family’s World Liberty Financial. Republicans, led by Scott, reject it as extraneous, further complicating passage amid 2026 midterm distractions.
Broader Implications for Crypto’s Future
Beyond immediate flaws, the draft undermines privacy-enhancing projects at a pivotal moment. As blockchain evolves into enterprise infrastructure—tokenizing assets from bonds to real estate—regulatory clarity should empower, not encumber. Global peers like Singapore, UAE, and Europe advance stablecoin rules, positioning the US to lead or lag.
Yet, persistent uncertainties around securities classification, property rights, and compliance persist. Even with SEC’s “Project Crypto” taxonomy and exemptions on the horizon, private litigation looms. The CLARITY Act could solidify CFTC-SEC roles but at the cost of innovation if unamended.
- Lack of BSA/AML immunity exposes developers to user-driven prosecutions.
- Travel Rule extension invades DeFi and self-custody privacy.
- Yield restrictions favor banks over crypto firms.
- Definitional gaps erode state investor protections.
- Ethics riders risk bipartisan deadlock.
A Call for Real Clarity Over Compromise
The CLARITY Act teeters on a knife’s edge, with Coinbase’s pullback signaling industry resolve. Lawmakers must heed calls for ironclad developer immunity, privacy carve-outs, and yield equity to avoid entrenching surveillance and banking dominance. A bad bill entrenches the worst of fiat oversight on a decentralized frontier; no bill preserves the fight for tomorrow’s draft.
Stakeholders from Wintermute to state regulators agree: true progress demands balancing consumer protection with unfettered innovation. Without robust safeguards, this legislation won’t clarify markets—it will cloud crypto’s promise, handing victory to those who fear its disruption. The Senate has a chance to rewrite history; the question is whether it will seize it before last-second drama seals a flawed fate.
