The Test Under the CLARITY Act: Decentralization Testing of Tokens

Author: Vaidik Mandloi; Source: TokenDispatch; Translation: Shaw, Golden Finance

Just last week, if you asked ten lawyers whether Ethereum is a security or a commodity, you could get as many as twelve different answers, and you would end up with a $50,000 consulting bill. This has been the real situation for those engaged in crypto-related businesses in the United States.

Regulators have been reluctant to issue clear rules, but afterward, they initiate lawsuits based on post-hoc interpretations, citing non-compliance. The entire industry has been stuck in a dilemma without clear standards to follow.

During Gary Gensler’s tenure as head of the U.S. Securities and Exchange Commission (SEC), the agency launched 88 enforcement actions against crypto projects, 92% of which stemmed from violations related to incomplete registration. In other words, many companies have been penalized simply for failing to register under a regulatory framework that has never been clearly defined.

This approach is utterly absurd; everyone in the industry knows it but feels powerless — the only way to escape this situation is to withdraw from the U.S. market.

But last Wednesday, the situation took a turn. The U.S. Senate Banking Committee passed the CLARITY Act with a vote of 15 in favor and 9 against. Senator Elizabeth Warren said the bill completely dismantles the securities law framework established since 1929. Her statement is partly true: the bill was drafted with extensive input from various industry stakeholders, but such a significant regulatory breakthrough should have been implemented years ago.

What substantive changes does the CLARITY Act bring? It establishes a practical standard for determining whether tokens are securities or commodities.

All tokens are initially classified as securities. If a project raises funds through token sales and commits to using those funds for project development, it constitutes an investment contract as defined by the Howey Test, placing it directly under SEC regulation. This rule has existed since the rise of crypto fundraising models and remains unchanged.

The real breakthrough of the new regulation is: Projects now have a compliant pathway to reclassify. The bill officially establishes mature blockchain standards: if a public chain is open-source, operates based on transparent rules, and no single individual or entity holds more than 20% of the total token supply, the project can apply to the SEC to demonstrate it has achieved sufficient decentralization and undergo review.

If the SEC does not object within 60 days, the token can be reclassified as a digital commodity, and regulatory jurisdiction will shift from the SEC to the Commodity Futures Trading Commission (CFTC).

The transfer of regulatory authority from the SEC to the CFTC is highly significant, as the two agencies have very different regulatory models. The SEC treats tokens as securities, requiring full registration, detailed disclosures, and ongoing financial reporting; whereas the CFTC regards tokens as commodities like oil or wheat, with a more lenient regulatory approach and lower compliance costs, focusing on ensuring fair market operation rather than restricting market participants. Any project verified through decentralization audits will see a substantial reduction in daily compliance costs.

Projects will have a four-year transition period to complete the shift. Teams can submit a declaration to the SEC indicating their plan to meet the mature blockchain standards within four years; as long as they steadily advance decentralization, they can enjoy temporary regulatory exemptions. But if, after four years, they fail to meet decentralization standards, the exemption will be revoked immediately, and the project will be fully subject to securities laws with stricter disclosure requirements.

Looking at the recently enacted GENIUS Act, the U.S. has established a comprehensive digital asset regulatory framework for the first time: regulations for stablecoins regarding reserves, operational licenses, and issuers are now clear; various tokens also have well-defined standards for classification, determining whether they fall under SEC or CFTC jurisdiction, with the key threshold being a maximum 20% token concentration. The real impact of this new regulation on existing projects and newly issued tokens is what truly warrants in-depth analysis.

Grassroots project issuance models are no longer feasible

Leading mainstream crypto assets face no pressure from this review. Bitcoin has no single holder approaching 20%, and has long been recognized as a commodity; after Ethereum’s merge, there are over 1.07 million validator nodes, making it the most widely distributed infrastructure among all smart contract blockchains.

In a joint interpretive announcement issued in March 2026, the SEC and CFTC officially classified 18 tokens as digital commodities, including Bitcoin, Ethereum, Solana, XRP, Cardano, Chainlink, and Avalanche. Investors holding these assets can rest assured that their regulatory status is settled and clearly falls within the commodity category.

However, projects outside this list face difficulties. Take Solana as an example: although it is listed as a commodity, it remains in a regulatory gray area, with this classification relying solely on industry interpretive opinions issued by regulators.

Such interpretive notices are essentially official explanations of existing laws by the two agencies, which influence market sentiment and price movements but lack formal legislative authority. The next SEC chair could issue a new interpretive statement at any time, without congressional approval or voting, potentially overturning Solana’s classification as a commodity overnight.

Startups that have not issued tokens need to be especially cautious. Under this bill, all new tokens are automatically classified as securities from inception. To escape securities regulation, they must submit disclosure materials, legal documents, and semi-annual operational reports to the SEC for many years, while steadily achieving decentralization standards.

Hiro Systems once attempted to complete the full SEC registration process, but compliance and legal costs alone exceeded $15 million—more than the total funds raised by the project.

This illustrates the true compliance costs under the new regulation. Although the bill allows projects to raise up to $50 million during the ecosystem’s transition period without full registration, building the complete compliant system required is extremely expensive. In practice, only well-funded projects with dedicated legal teams and venture capital backing can afford it.

This means that small startup teams lacking institutional capital will find it nearly impossible to pass these standards. The grassroots issuance model of Ethereum in 2014—community-driven, with $18 million raised without regulatory interference—has now become illegal under this new framework and is effectively extinct.

Almost missed: DeFi safe harbor

While the rules for classifying tokens as commodities and the decentralization standards have garnered much attention, Articles 309 and 409 of the bill, which establish safe harbor provisions for DeFi developers, may be the most critical parts of the entire legislation.

The bill explicitly states: Developers writing smart contract code, running validator nodes, or creating self-custody wallets are not considered financial intermediaries, do not need broker-dealer registration, and are not classified as money transfer service providers. Regulators cannot hold them accountable under such designations. The principle that code itself does not equate to asset custody is now formally written into the law.

This industry-protective clause originated from the Roman Storm case. Storm developed Tornado Cash, an Ethereum privacy mixer. He did not control any user funds, could not freeze or reverse transactions, and had no authority to shut down the protocol—its code was open-source and autonomous. Yet, in August 2025, the U.S. government convicted him of unlicensed money transfer operations. The root cause was that at the time, there was no legal distinction between software development and money transfer activities.

However, this industry safeguard still has major loopholes. During the committee vote, a temporary amendment was introduced that clarified developers could still be subject to regulation if their actions involve control through agreements, collaborations, or private arrangements: if the actor exerts substantial control over protocol operations via such arrangements, they will no longer enjoy safe harbor protection.

This means that in protocols like Aave or Compound, token holders who participate in governance proposals or treasury decisions could be deemed to have entered into such “collaborative arrangements.” Merely on this basis, developers working on these protocols could lose their compliance protections.

The safe harbor only covers the backend infrastructure, smart contracts, validator nodes, and node operators, and does not address front-end interfaces. Most users do not directly interact with raw smart contracts but rely on official front-end websites like Uniswap or Aave. If regulators determine that operating these front-end interfaces constitutes providing financial services, then the safe harbor only protects the underlying code but not the user-facing applications. This could trigger a major regulatory showdown in the DeFi space.

Jake Chervinsky, head of Hyperliquid Policy Center, said: “If this bill cannot accommodate the DeFi ecosystem, it loses its purpose.” Indeed, if the current provisions are not amended, the safe harbor will only exist on paper, leaving significant compliance risks in actual implementation.

Additionally, Warren proposed an amendment to grant the U.S. Treasury authority to sanction DeFi protocols, mimicking the regulatory actions taken against Tornado Cash in 2022. This amendment was defeated with a vote of 11 in favor and 13 against, with all Republican members voting against.

Currently, whether regulators can lawfully sanction open-source software without a controlling entity remains legally unresolved. The dispute will likely end up in court. When that happens, legal teams defending DeFi protocols can cite this vote as evidence: Congress has debated this issue thoroughly and explicitly rejected granting Treasury such sanctions authority. The outcome of this failed amendment will serve as a key legal basis for industry defense.

利益格局重塑：赢家与后续走向

The biggest beneficiaries of this legislation are actually traditional banking institutions. The CLARITY Act officially repeals SAB 121 accounting standards, which previously mandated financial institutions to include crypto assets on their balance sheets as liabilities. This accounting rule was a major barrier preventing traditional banks from entering the crypto custody space.

Now, major financial institutions can hold Bitcoin, Ethereum, and other assets compliantly without disrupting their capital adequacy ratios. Custody platforms like BitGo and Anchorage, which are now institutional-grade, can move beyond simple asset storage and leverage solid legal foundations to offer advanced services such as brokerage and clearing.

The asset tokenization market is also poised for real growth. Industry estimates for the tokenized asset market size in the 2030s range from $2 trillion to $30 trillion. The long-standing obstacle was the lack of compliant trading channels. The CLARITY Act clears this hurdle, establishing a legal bridge between traditional institutional capital and on-chain asset markets, removing the core barrier to capital inflow.

The most notable change is the synergistic effect with the GENIUS Act. Regulations related to stablecoins explicitly prohibit earning passive yields based on holdings, meaning investors can no longer simply deposit USDC in exchanges and earn 5% annualized returns. To generate yields, they must actively participate in the ecosystem—staking tokens, governance, or providing liquidity.

This has led to a massive capital migration: hundreds of billions of dollars, previously idle, are now flowing into standardized DeFi protocols like Pendle, Morpho, and Maple Finance. While legislators did not intend to push huge sums into DeFi, banning riskless passive holding yields has inadvertently accelerated this capital shift.

Compared to the regulatory chaos of the past decade, the CLARITY Act marks a significant step forward. Previously, the industry was mired in legal uncertainty, with regulators relying on lawsuits rather than clear rules. But the law’s provisions reveal clear favoritism toward established industry giants, with obvious regulatory footprints.

High compliance costs, a four-year ecosystem maturation period, and the need to build a full legal framework to enjoy exemptions favor well-funded, professional legal teams. For giants like Coinbase, this regulatory framework aligns with their interests; for emerging startups, these terms are set before they even enter the market, leaving them with little say.

Regulation has always been this way. Whether the crypto industry should develop along this path remains an open question.