Crypto & Fintech

By Mark Hays, Associate Director of Crypto and Fintech Policy

Late Sunday night, Senate Republicans and the White House dropped new text for the CLARITY Act, the crypto-industry drafted bill slated for a key vote in the Senate tomorrow. Dropping brand new text 40 hours before the vote is an attempt to cover up the massive shortcomings, risks, and harms of the crypto bill and trick Senators into voting for a giveaway to the crypto industry and crypto billionaires. 

No one should be fooled by this last-minute window dressing. Senators should still filibuster and block this bad bill. 

According to the drafters of the bill, the latest text purportedly addresses some (but not remotely all) of the huge problems in the crypto bill that had logjammed its passage for months, but the weak, toothless measures do little to address the significant shortcomings in the bill. It still fails to stop Trump’s crypto corruption; it still allows traffickers, rogue actors, and sanctions evaders to launder money with crypto; it still allows crypto platforms to unfairly gouge customers; and it still allows platforms to pay interest on stablecoins that will drain deposits from community banks.

Fails to prevent deposit flight from community banks

The now enacted GENIUS Act prohibited stablecoin issuers from paying interest on stablecoins, but it did not stop crypto platforms from offering interest-like incentives and rewards to lure potentially trillions of dollars of deposits from community banks, undermining their ability to provide credit to small business, farms, and households.  The new CLARITY Act text gives the Treasury Department “circuit-breaker” authority (but not a requirement) to issue proposed rules restricting stablecoin yield offerings only after deposit flight undermines community lending — but that is closing the barn door after the livestock have escaped. The legislation does not provide adequate tools to even pursue the so-called circuit breaker since the Treasury would have to make a finding on deposit flight before data on changes to deposits in smaller banks would be available or clear. Lastly, Congress should be highly skeptical that Trump’s Treasury Secretary will step in to protect small community lenders given the crypto industry’s political influence with the Trump administration and regulatory co-optation.

Fails to close money laundering loopholes for decentralized finance

Every version of the CLARITY Act has provided an gaping oversight exemption to decentralized crypto operators (so-called decentralized finance or DeFi) that effectively allowed these crypto players to avoid basic requirements, especially around the anti-money laundering rules. This DeFi loophole provided a roadmap for those trying to use crypto to launder proceeds from criminal activity or conceal transactions by terrorists and sanctions evaders. The new language slightly shortens the list of the types of DeFi players exempt from regulatory oversight but largely leaves untouched the whole problematic exemptive framework for DeFi. The revised text does strike language that would have exempted some DeFi actors from greater criminal liability – but still leaves in a raft of other anti-money laundering loopholes for crypto platforms overall. Crypto platforms have a long and storied history of playing fast and loose with what constitutes decentralization. The new language lets the Commodity Futures Trading Commission (CFTC) create registration requirements for non-DeFi platforms that ultimately only provides more explicit guidance on how crypto companies can lawfully and more easily evade regulatory oversight. 

Fails to prevent crypto platform self-dealing

The CLARITY Act earlier text failed to address significant conflicts of interest for vertically integrated crypto platforms that act as brokers, exchanges, and clearinghouses that expose customers to unfair prices, unsuitable investments, and riskier trading. The revised language adds vague and unenforceable provisions rather than meaningful and binding rules for platforms to set fair pricing, mitigate conflicts of interest, and limit proprietary trading and self-dealing. The new language fails to give the CFTC specific guidance on how proscriptive such rules need to be, which will leave an underfunded, understaffed agency co-opted by the crypto industry with both wide latitude and little real authority to make sure platforms actually adopt and abide by such rules. Since the legislation allows firms to self-certify that their digital assets are governed but with minimal review by the CFTC, crypto firms can quickly introduce new tokens with minimal oversight. Crypto platforms will maintain their upper hand at the expense of customers, and regulators’ hands, at both the state and federal level, will still be largely tied. 

Fails to address Trump’s crypto corruption

The new language still fails to address President Trump’s unprecedented profiteering from corrupt and conflicted crypto ventures while in office. It is almost mind-boggling that Trump negotiated the ethics language that would purportedly address his crypto conflicts of interest — the fact that the Trump White House signed off on this new language should be a clear sign that it will not meaningfully curb Trump’s crypto cash grab. Indeed, the latest Trump-approved ethics language fails by any measure to be considered a serious proposal to prohibit this corrosive problematic behavior. 

It prevents state attorneys general from bringing ethics enforcement actions against the president or public officials unless Trump officials give their permission. Only President Trump’s appointed U.S. Attorney General and in-house ethics counsel are able to determine whether the President violated these new rules and whether state AGs have standing to bring ethics charges. 

The weak divestiture provisions exclude the lion’s share of the Trump family’s existing crypto enterprises, excludes his sons who operate these firms, and allows carve-out that enable Trump’s branded crypto ventures to continue to generate profits. The updated legislation still locks-in special privileges and exemptions that allow crypto firms to continue siphoning cash from unsuspecting investors, which just enriches the biggest crypto firms and billionaires.

As we, along with leading democracy groups concluded in a recent letter, “Any ethics rule is meaningful only if it covers the right people, takes effect promptly, and can actually be enforced.” 

Senators should not be fooled by last-minute window dressing by the crypto industry on a bill they have spent considerably lobbying to ram through Congress. The new text still fails to meaningfully address the CLARITY Act’s irredeemable structural flaws, including prohibiting state securities regulators from protecting investors from scams and swindles. Tuesday’s vote is an opportunity for Senators to stand up to protect workers’ retirement, the economy, and public trust and reject yet another billionaire giveaway that benefits President Trump and connected crypto insiders. By voting to block the bill from proceeding further, Senators will be sending the message that they will not allow the risks, harms, and costs of the crypto industry to hurt everyday people and the economy.