Clarity for Crypto, Sort Of

 

“Congress often passes legislation riddled with policy land mines because the Members don't want to do the hard work of defusing them. A case in point is the crypto regulation bill now in the Senate that Republicans are rushing to pass before they leave town this week.

 

The Biden team tried to suppress cryptocurrency, a digital form of money, and keep it in the legal shadows.

 

Banking regulators advised banks to stay away. Securities and Exchange Commission Chair Gary Gensler punished crypto developers and exchanges for not registering with the agency, though federal law didn't expressly give him authority to regulate them.

 

---

 

While Trump officials have been friendlier, crypto continues to operate in a regulatory gray zone.

 

Last year's Genius Act provided some rules for stablecoins, which are cryptocurrencies designed to hold a fixed dollar peg similar to money-market funds.

 

But the legislation left some regulatory issues unresolved.

 

Enter the Senate's 616-page Clarity Act, which establishes a regulatory framework for digital assets. This would give the crypto industry more legitimacy and legal certainty, which is why the crypto boys support it.

 

The bill lays out rules for regulators to determine if a cryptocurrency is more like an investment contract (subject to SEC oversight) or a commodity (the Commodity Futures Trading Commission).

 

Cryptocurrencies sold to raise money for an enterprise would generally be treated as securities.

 

This would appear to include the Trump family's WLFI token.

 

Bitcoin and other digital tokens that aren't controlled by a person or company would generally be regulated as commodities.

 

The bill would also establish clear market structure rules that provide regulatory certainty for investors and banks so they don't have to worry about being whipsawed by the whims of a future administration.

 

Americans who aren't crypto investors could also benefit from the bill since it would provide a legal framework for banks to issue, trade and settle payments for tokenized securities -- for example, stocks and bonds with blockchain records. This technology would remove friction in the financial system and lower costs. All of this is worth supporting.

 

The problem is the bill also includes regulatory loopholes that could cause problems in the financial system. One provision would undermine the Genius Act's prohibition on stablecoin issuers paying interest by letting crypto exchanges offer "rewards" for what are essentially banking services.

 

Under the Genius Act, stablecoin issuers cannot pay interest on holdings. Congress was concerned that this would let stablecoins compete with banks for deposits without having to abide by the same capital and other regulations. If banks lose deposits to higher-interest bearing stablecoins, banks would have less capacity to make loans.

 

This is a particular risk for small banks that use interest payments to attract deposits. Big banks don't have to pay as much in interest since they benefit from their too-big-to-fail imprimatur. The Clarity Act would bless a workaround to the Genius Act by letting issuers arrange deals with crypto exchanges to pay "rewards" to customers that hold stablecoins.

 

These rewards could include lower-rate margin loans, trading credits, rebates on deposits or cash bonuses. Stablecoin issuers make money from assets they hold to back the token -- namely, Treasury bills. The more stablecoins that people buy and hold, the more money that issuers have to invest. Even if yields on Treasurys are relatively small, stablecoin issuers such as Tether Limited and Circle make money on volume.

 

That's why they want to encourage more people to buy and hold their stablecoins. Letting exchanges provide pecuniary incentives to stablecoin users could draw deposits out of small banks and thus reduce lending to small businesses.

 

The bill would also exempt so-called decentralized crypto networks from anti-money laundering and know-your-customer rules. These networks operate like eBay with users transacting directly and the operator taking a cut of transactions. Criminals could exploit this exemption to route illicit payments through these networks.

 

Many decentralized networks would also be exempt from SEC and CFTC regulation, which could spur trading of tokenized securities (including stocks) to migrate to these shadow markets with few or no investor protections. Such invitations for regulatory evasion can be fixed with tighter language, but the crypto lobby is pressing Republicans to pass the bill as is.

 

---

 

The House last year passed a version of the Clarity Act, and President Trump wants Congress to put a bill on his desk to reward his friends and donors in the industry. Democrats are demanding stricter restrictions on federal officials issuing and promoting cryptocurrencies while in office. Fair enough. Mr. Trump's crypto dealings are an embarrassment.

 

But they also underscore the need to establish a safe and sound regime for digital assets to protect investors.” [1]

 

1. Clarity for Crypto, Sort Of. Wall Street Journal, Eastern edition; New York, N.Y.. 05 Aug 2026: A14.