Galaxy Warning: U.S. Financial Oversight Powers to Experience Largest Expansion in 25 Years, DeFi Could Become the Primary Target

Galaxy Research issues a warning that the draft of the “Crypto Market Structure Act” (Clarity Act) currently under review by the U.S. Senate Banking Committee contains concerning provisions that will significantly expand the U.S. Treasury Department’s financial surveillance powers. Notably, the bill proposes allowing the Treasury to freeze transactions without a court order and extend authority over decentralized finance frontends. Galaxy Digital Research Director Alex Thorn stated that if these measures become law, it would represent the largest expansion of financial surveillance powers since the USA PATRIOT Act of 2001.

Key Provisions of the Bill Explained

A Qualitative Leap in Surveillance Power

The draft Clarity Act’s key risk points include two main aspects:

The core issue with these provisions is that they break the long-standing safeguard in U.S. financial regulation that “court authorization is required.” The Patriot Act expanded surveillance powers in 2001 but still retained judicial review mechanisms. The Clarity Act aims to further breach this line of defense.

Comparing with Historical Policies

The Patriot Act (2001) mainly expanded intelligence agencies’ surveillance powers, but the financial sector still retained many procedural protections. The Clarity Act directly targets the authority to freeze financial transactions, and does so without prior judicial procedures. This means regulators can act more quickly and directly, but it also significantly reduces the rights and protections of users and platforms.

Impact Pathways on the Cryptocurrency Industry

Areas of Direct Threat

• DeFi Ecosystem: Frontend applications face direct regulation, user interactions may be restricted
• Stablecoin Infrastructure: Transaction freezing authority threatens payment stability and impacts emerging infrastructure like Rain
• Exchanges and Custodians: The expanded power to freeze without court orders increases compliance risks
• Cross-border Transactions: U.S. Treasury’s expanded authority could affect dollar transaction chains

Industry’s Proactive Response

Recent reports indicate that the crypto industry is actively responding to regulatory changes. Ripple CEO Brad Garlinghouse will participate in a high-level conference in Switzerland on January 15 to discuss “Are crypto companies compatible with traditional public markets?” This reflects the industry’s efforts to seek compliance integration with traditional finance. Meanwhile, Galaxy, as a major investor, participated in Rain’s (stablecoin infrastructure) funding, and Plume submitted a 40-page tokenization policy proposal to Bermuda. These actions demonstrate that the industry is actively involved in policy-making rather than passively accepting regulation.

Possible Future Developments

If the Clarity Act is ultimately passed, the cryptocurrency industry may experience the following changes:

• Accelerated Compliance: Projects will more actively seek regulator-friendly operational models; built-in anti-money laundering mechanisms like Plume could become standard
• Geographical Diversification: Some projects may accelerate international expansion, choosing jurisdictions with more favorable regulation
• Technological Innovation: Privacy protection and self-custody technologies may receive renewed focus
• Deeper Institutional Participation: Traditional financial institutions may accelerate involvement, given their familiarity with strict regulatory frameworks

Summary

The Clarity Act signifies not just an expansion of powers but a major shift in the paradigm of financial regulation. Galaxy Research’s warning is not alarmist but based on an objective analysis of the bill’s provisions. The key point is that this expansion targets the crypto sector, which is itself moving from the fringes toward mainstream acceptance. The current industry response involves multiple strategies: actively participating in policy formulation, accelerating compliance efforts, and preparing technologically and geographically.

For ordinary investors, the most important thing is to understand that this is not just short-term market volatility but a long-term change in the regulatory landscape. Choosing projects with strong compliance and institutional backing may be a safer approach in this new era.