After the Genius Act, what should the Clarity Act focus on?

Author: Zuo Ye

Crypto Week's triple strike, the Genius Act dedicated to stablecoins, has become law, while the anti-CBDC Act and the CLARITY Act are still in the legislative process.

Unlike the Genius Act, the CLARITY Act focuses on the fundamental definitions and authority allocations for cryptocurrencies, especially regarding public chains, DeFi, token issuance, and the powers and responsibilities of the SEC and CFTC, and it is closely linked to the 2024 FIT21 Act.

Image Caption: U.S. cryptocurrency regulatory framework, Image source: @zuoyeweb3

Accordingly, the U.S. has built a complete regulatory framework extracted from past practices; understanding history is essential to clarify the future.

Financial Liberalization, The Wild New West

Monetary issuance and inflation, with the Fed defending the former in the name of controlling the latter, while Trump abandoned the latter under the guise of amplifying the former.

The Genius Act has ushered in an era of free stablecoins, as Powell's insistence on independent monetary issuance has been diluted and handed over to Silicon Valley's new aristocrats and Wall Street's old money, but that is not enough; Peter Thiel demands absolute freedom for libertarians.

In 2008, the financial crisis made financial derivatives a target, and Obama urgently needed professionals to help him control the $35 trillion futures market and the $400 trillion swap market.

Thus, Gary Gensler was nominated as CFTC chairman, and in 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted, bringing the derivatives market under existing regulatory frameworks.

Gary claimed, "We must tame the Wild West," marking the first time Gary defeated the market from a regulatory perspective.

History is cyclical. In 2021, Obama’s ally, then-President Biden, nominated Gary Gensler again as SEC chairman, attempting to cycle through the new western frontier------cryptocurrency.

There are two focal points:

1. There is no dispute that BTC/ETH is a commodity, but other tokens and IXOs are considered illegal securities offerings, including SOL and Ripple;
2. Regarding the high-leverage activities of exchanges, Gary believes this is "inducing" users, initiating special regulatory actions against onshore and offshore entities like Coinbase and Binance.

However, with one slip, Gary ultimately bowed to the ETF, a product that seemed not to be a regulatory focus. In 2021, the SEC approved the Bitcoin futures ETF, but has remained tight-lipped regarding the spot ETF proposals from Grayscale and others.

But unfortunately or not, in 2024, after the SEC's partial defeat against Ripple on the IXO issue, the SEC eventually approved the spot Bitcoin ETF, allowing MicroStrategy to openly engage in a cryptocurrency-stock-bond cycle.

This time, cryptocurrency representatives from the wilder side conquered the SEC, CFTC, White House, Congress, as well as the Fed and Wall Street; an unguarded era has arrived.

As a footnote, SBF successfully landed himself in prison in 2022 after donating tens of millions to Biden's campaign, which may be a significant reason for Gary's strictness towards the crypto industry.

CLARITY Act, Crypto Has a Name from Now On

Trump has a gracious heart; the cryptocurrency industry will now shine brightly.

In 2025, as a relic of two Democratic presidents, Trump, upon taking office, chose to fire Gary and appointed Paul Atkins, who had been friendly with him since 2016, to lead the charge towards complete laissez-faire.

The CLARITY Act was proposed against this backdrop; however, it must be stated that the CLARITY Act is still in the legislative process, having completed the House of Representatives phase but still needing to pass through the Senate.

The Senate also has its own Digital Asset Market Structure and Investor Protection Act. However, under the Republican-led agenda framework, being crypto-friendly is inevitable.

Image Caption: Subsequent process of the CLARITY Act, Image source: @zuoyeweb3

The current CLARITY Act frameworks digital commodities, digital assets, and stablecoins by first limiting stablecoins to payment forms, secondly placing digital commodities under CFTC management, and assigning digital assets to SEC oversight.

Image Caption: CLARITY Act regulatory framework, Image source: @zuoyeweb

1. CFTC wins big: clarifying the status of ETH and the CFTC, while blurring the boundaries between SEC and asset issuance.

ETH is a commodity; truly decentralized public chain tokens are commodities, with their trading belonging to the CFTC. IXOs, SAFTs, and other financing still fall under SEC management, but there is a $75 million exemption that allows tokens to convert to decentralized status within four years post-issuance.

2. Digital commodities exist in digital form and are, in essence, commodities.

Keep pace with technological developments; no longer crudely dividing between "physical goods" and "virtual assets," recognize the existence of digital commodities, and as long as they have practical value related to public chains, DeFi, and DAO protocols, they will no longer be considered securities.

However! NFTs must be assets, not commodities, because each is unique, possessing only speculative or aesthetic value, and cannot serve as a unified exchange medium like currency. Moreover, interests, rewards, and profit-sharing must contribute value to maintaining the decentralized operation of the protocol to avoid being classified as assets; otherwise, they will all fall under SEC regulation.

This definition may still seem abstract; essentially, the CLARITY Act differentiates between the token issuance process and the token operation process. The following three cases are my categorized situations; please correct me if there are any inaccuracies:

• IXO issuance is a security; if the issuance of tokens meets the conditions, it is not.
• Airdrop points are securities, but airdropped tokens that meet conditions are not.
• Exchange distribution is not a security, but promised returns are securities.

Meeting conditions refers to the definitions and criteria for digital commodities, with a commitment to future conversion to decentralized protocols and no intermediary required for trading. However, it should be noted that participating in a project itself is a form of investment; if expected returns are sought, it constitutes participation in asset issuance.

How definitions will evolve remains unclear, but many past cases can offer division criteria:

• ETH is a digital commodity, but using a SAFT for project financing is classified as digital asset issuance, under SEC jurisdiction. However, if it later converts to a fully decentralized protocol, it will become a digital commodity, under the CFTC's purview.
• ETH staking is also a commodity, representing a "system behavior" that maintains the PoS characteristics of the public chain. However, whether tokens issued by third-party DeFi staking protocols can be classified as commodities remains uncertain; for instance, Lido is debatable, while EigenLayer may lean more towards being a commodity, necessitating clear regulatory details.
• Ethereum is a blockchain, but many SAFTs or IXO-issued L1/L2s are given a four-year period to achieve decentralization, where the single centralized control of tokens or voting rights cannot exceed 20%. Current common foundation or DAO regulations might not grant immunity; analysis of token holding proportions is necessary.

The CLARITY Act is indeed very detailed, setting a framework for joint oversight by the SEC and CFTC, accommodating the distinct characteristics of digital commodities alongside virtual securities and physical goods, necessitating collaboration between both to address the complexities.

Conclusion

The CLARITY Act is a critical element of U.S. cryptocurrency regulation, fundamentally defining tokens and public chains and clarifying the definition of digital commodities. The remaining tasks naturally involve assets, such as NFTs, stablecoins, and tokenized assets (RWA).

However, the operation of DeFi remains in a gray area. Although the CLARITY Act has revised the definitions within the Securities Act, DeFi is too important—like the Securities Act, the crypto market also needs a dedicated DeFi Act, rather than being crammed together with stablecoins, public chains, and tokens.

This is not a case of taking incremental steps; in constructing the U.S. cryptocurrency regulatory framework, the Tornado Cash case is still ongoing, and the fate of co-founder Roman Storm will serve as a touchstone for judicial pressure on legislation.

Recommended readings:

Stablecoins Breaking Barriers: An In-Depth Analysis of 12 Countries' Stablecoin Regulatory Policies

U.S. House Passes Three Cryptocurrency Bills—What Happened to the National Team's Bitcoin Chip War?