The Clarity Act's Likely Demise: What Comes Next for Crypto Regulation

The US crypto industry recently experienced a major milestone with the House of Representatives passing the Digital Asset Market Clarity Act, which aims to establish a regulatory framework for the industry. However, before this development could be fully digested, the Senate began working on a separate but similar bill that is likely to have a more significant influence on the industry's future. The Senate's bill is expected to be a carefully crafted compromise that balances the interests of various stakeholders, making it more likely to be approved by the administration and the House. Throughout the US crypto policy journey, the House has typically taken the lead in drafting legislation, while the Senate has been a more challenging battleground. Prominent House Republicans, such as Majority Whip Tom Emmer and House Financial Services Committee Chairman French Hill, have urged the Senate to adopt the Clarity Act and pass it. However, pro-crypto lawmakers in the Senate are exploring alternative strategies to garner sufficient Democratic support for the final bill. The Senate bill, like the Clarity Act, would establish clear boundaries between digital assets and the agencies responsible for regulating them. The next bill is expected to elevate the Commodity Futures Trading Commission to a leading role in the crypto world. The public has only seen a 182-page discussion draft released by Republicans, which has not yet been formally introduced. The Senate Banking Committee aims to move the bill to the amendment stage and set it for a committee vote. However, the process may be complicated by the current standoff over the US spending plan, which could lead to a government shutdown if common ground is not found. Senator Kirsten Gillibrand, a New York Democrat working towards bipartisan crypto legislation, emphasized that the fiscal cliff is the most pressing issue for Congress at the moment. Once a crypto bill clears the Senate, the White House expects it to have been written in close consultation with House lawmakers and should be approved by that chamber as-written. Even if the long-awaited market structure legislation becomes law by the end of 2025, it will initiate a lengthy process of interpretation and translation into new regulations that will govern the sector. Regulators such as the Securities and Exchange Commission, CFTC, and the Treasury Department's Financial Crimes Enforcement Network will need to navigate their requirements and figure out how to meet them, involving a process of making proposals and putting them out for public comment. The typical rulemaking process can take a year or two, and this is a whole new regulatory field with a high level of public interest. The comments will be numerous, and the US regulatory apparatus would likely take until 2026 to produce the regulations, with new financial standards historically coming with an implementation window of a year or two before they must be followed.