A cryptocurrency market structure bill that offends everyone

Written by: Eric, Foresight News

On January 15, Beijing time, crypto journalist Eleanor Terrett reported that due to Coinbase's public opposition, the internal review of the "Digital Asset Market Clarity Act" originally scheduled for this Thursday by the U.S. Senate Banking Committee (hereinafter referred to as the "Banking Committee") has been canceled, and no subsequent schedule has been announced.

This Thursday was initially set for internal reviews by both the Senate Banking Committee and the Senate Agriculture Committee (hereinafter referred to as the "Agriculture Committee"), but the latter has been postponed to the end of the month due to bipartisan disagreements, while the former has just been revealed to have postponed its review with an undetermined subsequent schedule.

The "Digital Asset Market Clarity Act" (referred to as the CLARITY Act) is a regulatory guideline that the entire Web3 industry has high hopes for. Overall, the CLARITY Act aims to establish a clear regulatory framework for digital assets, determining "who regulates whom, who is regulated, and how broadly," addressing the long-standing issues of ambiguous regulatory boundaries for digital assets and the problem of "replacing regulation with enforcement."

However, when the full text of the proposed bill by the Banking Committee was revealed, all industry participants were taken aback: the bill imposes nearly harsh regulatory requirements on Web3 projects and related institutions, with strict regulations on token financing, transfer, and sale, regardless of registration exemptions. Some industry participants jokingly remarked that this bill does not resemble one drafted by a pro-cryptocurrency government, but rather looks like a version that would be proposed by the Harris administration.

Who Drafts the Bill?

For readers who are not yet familiar with the CLARITY Act, here is a brief background introduction.

In July 2025, the U.S. House of Representatives passed the initial version of the CLARITY Act with 294 votes in favor and 134 against, submitting it to the Senate. After the House vote, the market optimistically estimated that the bill would successfully pass in the Senate before Thanksgiving 2025, at the latest by the end of the year. However, the reality is that since the bill involves the division of regulatory authority between the U.S. Securities and Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC), the Senate version will be drafted by the Banking Committee, which oversees the SEC, and the Agriculture Committee, which oversees the CFTC, each drafting a portion. After internal reviews are approved, the two will be integrated into a single bill and submitted for a full Senate vote.

For the CLARITY Act, the content drafted by the Banking Committee includes definitions of tokens, limitations on the SEC's regulatory scope, registration and exemption clauses for Web3 projects, and certain aspects related to banks and stablecoins; the content drafted by the Agriculture Committee includes the regulatory scope of the CFTC, the rights and obligations of intermediaries such as exchanges, etc. The reason the Agriculture Committee is involved is that in earlier years, commodity futures only included agricultural products, so the CFTC was supervised by the Agriculture Committee. Even though the types of futures have since expanded to precious metals, energy, and even cryptocurrencies, the U.S. government has not changed the supervisory body for the CFTC.

Currently, the CLARITY Act is stuck on reaching a consensus within the two committees, and there is no agreement on the basic version yet. After that, both committees will need to conduct internal reviews and merge, with a long way to go before entering a full Senate vote.

Why is the Bill Considered "Harsh"?

Objectively speaking, this bill is welcomed by retail investors; however, for institutions and project parties that have spent real money lobbying and invested significant effort in providing suggestions, it sets strict rules that are far from the previously anticipated "encouragement of innovation."

New Definition of Tokens

In the bill's new definition of "tokens," native tokens of public chains (such as Ethereum's ETH and Solana's SOL) are defined as "Network Tokens," which are not considered securities but must disclose information as required; tokens from DApps and other Web3 projects are defined as "Ancillary Assets," which fall under "investment contracts." Although they can be exempt from registration, they still face transfer restrictions and disclosure requirements.

Regarding NFTs, apart from types such as artworks, tickets, and memberships that are not considered securities, large-scale minted and tradable NFTs, fractionalized NFTs, and NFTs representing economic rights to underlying assets will all be regarded as securities. Under such terms, "blue-chip NFTs," including Pudgy Penguins and the soon-to-be-launched Moonbirds, will be considered securities.

As for tokenized securities like stocks, the bill explicitly requires that existing securities laws apply without exception, with the bill only making "adaptations" for technical details, and it does not provide any loopholes for the securities attributes themselves. All RWA that meet the definition of securities cannot evade regulation through tokenization, and the once-popular U.S. stock tokenization trading platforms may also need to comply with broker-dealer regulatory requirements.

Although this bill is somewhat milder compared to the SEC's previous stance of "everything is a security," the disclosure and transfer requirements are unexpectedly strict.

According to the bill, before a project is recognized as "decentralized," it must submit required disclosure information to the SEC at least 30 days before the token issuance, including company information, financials, token economic models, risk factors, etc., and disclosures must occur every six months for three years. Disclosure can only cease after submitting a "termination certification" confirming that the project has become "decentralized."

Additionally, before being recognized as decentralized, related parties (founders, employees, controllers) are prohibited from transferring more than a specified number of tokens (exact quantity not determined) within 12 months. After being certified as decentralized, related parties must still lock up tokens for six months and may not transfer more than 10% of the annual circulation within any 12-month period. The conditions for certifying decentralization include three aspects: whether the code is open-source, whether token holdings are sufficiently decentralized, and whether on-chain governance is effective, with specific values to be determined by the SEC. After the project submits its application, if the SEC directly recognizes it or no objections are raised within 90 days, it is considered approved.

In summary, while many tokens are no longer recognized as securities, the obligations for disclosure are very strict, and many restrictions can only be lifted once the project is recognized as decentralized by the SEC. As of now, many projects set up "liquidity incentive pools" or "community funds" that exceed 20% of the total issuance, and according to the existing bill requirements, project parties may have to wait until these funds are fully distributed before applying for decentralization certification.

Registration and Financing of New Tokens

For projects looking to raise funds through token sales, two hard requirements must be met to qualify for registration exemption: annual financing must be less than $50 million and total financing must be less than $200 million; the tokens released during financing and the funds invested by investors must be held in escrow by a third party. Failure to meet either requirement necessitates normal registration with the SEC under U.S. investment laws.

The financing limit is easy to understand, and the escrow requirement means that the project party does not have ownership of the financing funds before the tokens can be transferred to investors. This regulation will eliminate many current ICOs that can arbitrarily modify rules and allow for oversubscription. In the future, all token financing may need to have predetermined rules, and participants may face KYC and other reviews from the escrow institution since they are entrusting their funds to it.

If a project's financing amount exceeds the limit or refuses to use an escrow institution, it must follow the normal registration process under investment laws, or it will be considered illegal. Even if the project party meets the exemption conditions, it still needs to comply with the previously mentioned disclosure requirements until the project completes decentralization certification.

DeFi Regulation and Developer Protection

In terms of DeFi, if a protocol can be controlled, modified, or reviewed by a single person or group, it will be deemed "non-decentralized" and must register as a securities intermediary, complying with SEC and FinCEN rules (including AML, KYC, and record-keeping); if the front end of DeFi is operated by a U.S. entity, it must use on-chain analysis tools to screen sanctioned addresses, prevent transactions with sanctioned addresses, and implement risk assessments and record-keeping.

If recognized as decentralized, it will be treated similarly to other decentralized projects and will largely be exempt from regulatory scrutiny.

For developers of the protocol, if they are not project team members but merely write code, maintain systems, or provide nodes, liquidity pools, etc., they will be exempt, provided they do not have the authority to control the protocol rules. However, anti-fraud and anti-manipulation clauses still apply to such developers.

Digital Asset Brokers and Banks

The bill stipulates that digital assets are included under the Bank Secrecy Act, and digital asset brokers, dealers (such as market makers), and exchanges must establish AML/CFT (anti-money laundering and counter-terrorism financing) programs, register as money service businesses, comply with sanctions regulations from the U.S. Treasury Department's Office of Foreign Assets Control, report suspicious transactions, and implement customer identification measures.

Regarding banks, the bill allows banks to engage in activities including digital asset custody, trading, lending, stablecoin issuance, node operation, and self-custody wallet software development. Additionally, the bill makes specific provisions regarding stablecoins: it prohibits paying interest solely for holding stablecoins but allows for "activity-based rewards" based on trading, liquidity provision, governance, etc. Banks are not allowed to claim "similar to deposits, FDIC insurance" in their promotions.

Decentralization Cannot Be an Exception

Coinbase founder Brian Armstrong pointed out issues he perceives in a post on X: it effectively prohibits stock tokenization; grants the government the authority to regulate users' DeFi transaction records; further expands the SEC's power, stifling innovation; and prohibits stablecoin rewards, giving banks the ability to undermine competitors.

From an objective perspective, this bill seems to have offended nearly all industry participants: Web3 projects are required to disclose regularly and are subject to regulation on cashing out, exchanges are almost indistinguishable from traditional brokerages, NFTs are essentially banned, DeFi faces numerous restrictions, and individual investors' cryptocurrency financial situations are laid bare.

The good news is that this bill significantly raises the cost of wrongdoing for project parties; to cash out, they must ensure that the token price remains attractive while meeting decentralization requirements, and they cannot privately cash out through OTC channels. Investors can understand the true nature of projects through regular disclosures, no longer being deceived by flowery language on X. Furthermore, these new compliance requirements raise the entry barrier for small companies, allowing larger companies to maintain their monopolistic positions more effectively.

The current content of the bill does not treat the Web3 industry as an emerging sector but rather unhesitatingly incorporates it into the regulatory framework of traditional finance. Clearly, the real financial backers behind the Banking Committee, Wall Street banks, and other financial institutions cannot accept losing their voice and pricing power. New players wishing to join must adhere to these rules that may have been established a century ago, and within this framework, cryptocurrencies are merely another form of securities.

Another reason for the bill's deviation stems from the bipartisan struggle. The political maneuvering behind the CLARITY Act is quite complex. Regarding the bill itself, the Republican Party, associated with Trump, hopes to provide a relaxed regulatory environment to make the U.S. the "crypto center" of the world, while the Democratic Party believes that the terms proposed by the Republicans are too lenient, arguing that a "pro-industry, weak regulation" approach cannot fully protect investor interests and may even condone "political corruption" behaviors like Trump’s own token issuance.

For the Republican Party, which holds 53 seats, they need 60 votes to ensure that a Filibuster is not triggered (a Senate rule designed to protect the minority party's right to speak, allowing senators to speak without a time limit; as long as the majority party does not have 60 votes to pass a motion to end debate, the minority can indefinitely delay the bill vote through Filibuster). This means they need to win over at least 7 Democratic senators to safely pass the bill vote.

However, with the midterm elections approaching in November 2026, some Republican senators are concerned that supporting a lenient bill could provoke dissatisfaction among certain voters due to Trump's overt manipulation in the cryptocurrency space. This puts additional pressure on the Republicans.

As a result, either the Republicans were never inclined to support innovation, or they made significant compromises under pressure from the Democrats. According to information disclosed by Galaxy Research Director Alex Thorn on January 7 on X, the Democrats had proposed modifications regarding the front end, DeFi, financing limits, etc., and these demands were reflected in the bill made public yesterday. It seems that the deviation in the bill's content may stem more from compromises made by the Republicans.

Unlike Coinbase, a16z and Kraken believe that while the bill is still not perfect, it should not be delayed any further. For VCs, stricter regulations can directly eliminate meme tokens, creating more space for "VC tokens." However, for retail investors, the corresponding investor protection means the end of decentralization; the house in the casino is no longer some random guy, and the tokens that survive will have their pricing power returned to capital.

The current CLARITY Act, rather than being a shield for investors, is more like a decree from capital to pacify cryptocurrencies.