Crypto for Advisors: Is the Clarity Act dead?

Happy Thursday, advisors!

In today’s newsletter, Aaron Brogan analyzes why the Clarity Act may be falling short of industry needs.

Then, in “Ask an Expert,” Trevor Overko weighs in on the bill’s potential implementation.

Happy reading.

Yea or nay to clarity

Image (web only): TK

As you might have seen, the heavily contested “ethics” portion of the pending Digital Asset Market Clarity Act has had a bit of a bumpy ride. The language, that would prohibit certain federal officials, including the President, from issuing cryptocurrency tokens while in office, has long been a cornerstone of the Democratic crypto agenda.

This is a tricky issue for Republicans because in order for the crypto bill to become a law, President Trump has to sign it, and historically he has liked issuing cryptocurrency tokens. Nonetheless, they reached an agreement on proposed language and sent it to their colleagues across the aisle. Unfortunately, this was not well received, with Sen. Ruben Gallego noting “Whatever piece of s**t they sent back to us, that was not a serious effort.”

This comes as Senate Majority Leader John Thune threw in the towel and told reporters that the bill was not going to pass before September. And if you are a reader of tea leaves, that means it is dead. Congress tends to spend the autumn months of election years campaigning to keep their jobs and if Democrats win either house, as they are expected to, there will be no bill before 2029. Anything can happen, but things are not looking good for the plucky bill that couldn’t.

That may be good though after all, because much of the industry organizing to support the bill obscured the fact that it is a heap. The basic problem with Clarity is that it is meant to enable a design paradigm that doesn’t exist anymore. Now that it has finally stopped mooing, we can admit it.

Clarity would have functioned by creating a complex matryoshka of overlapping categories. It creates three nested categories. A “digital commodity” is expected to mean a fungible blockchain-based asset capable of exclusive possession and peer-to-peer transfer. A “network token” is a digital commodity intrinsically linked to a distributed-ledger system and deriving, or reasonably expected to derive, value from its use. An “ancillary asset” is a network token whose value depends on the managerial or entrepreneurial efforts of an originator or related person.

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The ultimate goal should be durable principles in legislation, adaptable rules from regulators and, importantly, a formal review after the market has operated under said framework for a reasonable period. The biggest mistake would be expecting the first version to be perfect and then refusing to adjust as the market develops. Currently, the factual framing is consistent with the latest Senate language, which includes initial and semiannual disclosures, insider resale limits, intermediary registrations, customer asset protections and divided SEX and CFTC responsibilities.

- Trevor Overko, co-founder, Sapien