Free Markets and Innovation, Sort Of

The Wall Street Journal's Aug. 4 editorial on the Clarity Act, "Clarity for Crypto, Sort Of," opens by warning that Congress passes bills riddled with policy landmines because members won't do the work of defusing them. That’s a fair worry in general, but it doesn’t apply here. The editorial concedes more than the headline suggests. It credits the bill with ending the regulatory gray zone the last administration left behind, with giving investors and banks rules a future administration cannot simply discard, and with opening a path for innovations like tokenized stocks and bonds that would strip friction and cost out of the financial system. All of that, in the board's own assessment, is worth supporting. The board is not calling to reject Clarity, but for tighter language on a few provisions.

Summer Mersinger is CEO of the Blockchain Association and a former commissioner of the U.S. Commodity Futures Trading Commission.

Rewards

Start with what the bill actually forbids. Payment for merely holding a stablecoin is prohibited. So is any program that ends up economically or functionally equivalent to interest on a bank deposit – and the text attaches penalties to the attempt. That test is the whole provision, and the editorial's warning about rewards paid to customers for holding stablecoins falls inside it.

What the text does permit is rewarding a customer for activity, so long as the reward isn't equivalent to a bank deposit. Credit card and loyalty programs have operated on that principle for decades without causing risk to the banking system. The argument against extending it to a new set of competitors argues that big banks should hold a monopoly on rewarding customers, which is an extreme form of protectionism.

DeFi

Here, the provision points in the opposite direction from the editorial. Section 10301 is not an exemption. It orders the SEC, with Treasury, to write rules for people who control protocols that are decentralized in name only: where someone can materially alter the protocol's rules, where operation turns on discretion rather than transparent code, where a party can restrict or censor use.

Section 10201 separately pulls registered digital commodity brokers, dealers, and exchanges fully inside Bank Secrecy Act reporting obligations, and Title IX puts $3 billion behind state and local investigators to use over five years. We set this out at length this week answering [x.com] the National Sheriffs' Association, which made a version of the same misreading. To say the bill is weak on illicit finance is simply not true.