CLARITY Act: Defining a New Order for Encryption

The regulatory framework for encryption in the United States is gradually improving. Following the Genius Act becoming law, the CLARITY Act is also in the legislative process. Unlike the Genius Act, the CLARITY Act focuses on the fundamental definitions and authority allocations in the encryption field, covering aspects such as public chains, DeFi, and token issuance, while clarifying the responsibilities of the SEC and CFTC. This act is closely related to the FIT21 Act of 2024.

The United States is building a complete regulatory framework based on past practices. Looking back at history helps us better understand the direction of future development.

The Evolution of Financial Regulation

After the 2008 financial crisis, the Obama administration appointed Gary Gensler as the chairman of the CFTC to regulate the financial derivatives market. The Dodd-Frank Act, enacted in 2010, brought the derivatives market under regulatory oversight.

In 2021, the Biden administration again nominated Gary Gensler to serve as the chairman of the SEC to address the emerging field of encryption. The SEC has no objection to the commodity properties of Bitcoin and Ethereum but believes that other tokens and ICOs may involve illegal securities issuance. At the same time, the SEC is also regulating the high leverage practices of exchanges.

However, the SEC's stance in the ETF space has changed. After approving Bitcoin futures ETFs in 2021, it approved Bitcoin spot ETFs in 2024, marking a significant shift in regulatory attitude.

Core Content of the CLARITY Act

The CLARITY Act provides a clearer definition and regulatory framework for the encryption industry:

1. Clarified the regulatory status of the CFTC, confirming Ethereum as a commodity. Truly decentralized public chain tokens are regarded as commodities, and trading falls under the jurisdiction of the CFTC.

2. Redefined the concept of digital goods, recognizing their uniqueness. As long as they have practical value for the operation of public chains, DeFi, and DAO protocols, they can be regarded as goods rather than securities.

3. Distinguishes between the token issuance process and the operational process. ICO issuance may be considered as securities, but if specific conditions are met, the tokens issued afterwards may not fall under the category of securities.

4. A financing exemption limit of $75 million has been set, providing space for small-scale projects.

5. Give the project four years to complete decentralization; if the requirements are met, it may be exempt from penalties.

The CLARITY Act seeks to find a balance between encouraging innovation and protecting investors. It provides more detailed guidance on the classification and regulation of digital assets, but there are still some gray areas that need further clarification.

Future Outlook

Although the CLARITY Act addresses many core issues, there is still uncertainty regarding regulation in the DeFi space. Given the importance and complexity of DeFi, there may be a need for dedicated DeFi legislation in the future.

At the same time, cases like Tornado Cash will continue to test the boundaries of regulatory frameworks. The rapid development of the encryption industry means that regulatory policies may need to be constantly adjusted and improved.

Overall, the CLARITY Act represents a significant advancement in the United States' regulation of encryption. It provides clearer guidance for industry participants while also laying the groundwork for future policy development. As technology and markets continue to evolve, we can expect to see more refined and improved regulatory measures introduced.