Until last week, if you asked ten lawyers whether Ethereum was a security or a commodity, you'd get twelve different answers, plus a $50,000 bill. This was the state of affairs for developing any cryptocurrency project in the United States. There were no clear rules because regulators refused to set them, and later filed lawsuits accusing developers of non-compliance based on ex post facto interpretations. Under Gensler's leadership, the Securities and Exchange Commission (SEC) filed 88 enforcement lawsuits against cryptocurrency projects, 92% of which were for registration violations. This meant that these companies were being punished simply for not registering within a framework that the SEC had never clearly defined. It was utterly absurd; everyone in the industry knew this, but there was nothing they could do, because the only way out was to leave the United States. But two weeks ago, the Senate Banking Committee passed the Clarity Act by a vote of 15 to 9, and things changed. Elizabeth Warren called the bill "tears open a loophole in securities law since 1929." She's half right. The bill was indeed heavily influenced by industry figures. But the loophole it tore open should have been closed years ago. What exactly does the CLARITY Act do? It provides a practically tested answer to the debate between securities and commodities. By default, all tokens are initially securities. Once you raise funds by selling tokens and promise to use those funds to develop a product, according to the Howe case, this constitutes an investment contract, and you are subject to regulation by the U.S. Securities and Exchange Commission (SEC). This has never changed; it has been since cryptocurrency fundraising began. The new change is that there is now a way out. The bill introduces the so-called "mature blockchain" test. If your blockchain is open source, operates on pre-defined transparent rules, and no individual or group controls more than 20% of the token supply, you can apply to the U.S. Securities and Exchange Commission (SEC) to have it reviewed, demonstrating that your level of decentralization is high enough. If the SEC does not raise any objections within 60 days, your token will be reclassified as a digital commodity, and the regulatory body will change from the SEC to the Commodity Futures Trading Commission (CFTC). The shift from the SEC to the CFTC is significant because the two agencies operate very differently. The SEC treats tokens as stocks, meaning full registration, detailed disclosure, and ongoing reporting obligations are required. The CFTC, on the other hand, treats it like commodities such as oil or wheat, with lighter regulation and lower costs. Its primary responsibility is to ensure the fair operation of the market, not to decide who can participate. For any project that passes the decentralization test, the daily costs of being a regulated entity are significantly reduced. You have four years to achieve your goal. You can submit a notification to the U.S. Securities and Exchange Commission (SEC) indicating that your blockchain plan will reach maturity within four years. As long as you continue to make progress, you can enjoy a temporary exemption. However, if your blockchain is still not decentralized enough after four years, the exemption will expire, and you will be subject to full securities laws again, facing more stringent disclosure requirements than initially. If you combine this with the GENIUS Act, the stablecoin regulatory law that took effect last year, you'll find that the U.S. now has a comprehensive regulatory framework for digital assets for the first time. Stablecoins have clear regulations regarding reserves, licensing, and issuance rights. Tokens now have a specific testing standard to determine whether they should be regulated by the U.S. Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC), and this standard includes a specific threshold: 20%. But what does this mean for existing and newly launched token projects? That's where the real fun begins. The Impossibility of Grassroots Movements The largest crypto assets should have no problem passing this test. Bitcoin has no single entity holding close to 20% of the shares and has been treated as a commodity for years. Ethereum, with over 1.07 million validator nodes after its merger, has the most extensive infrastructure distribution of all smart contract platforms. A joint explanatory notice issued in March 2026 by the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) has designated 18 tokens as digital commodities, including Bitcoin, Ethereum, Solana, Ripple (XRP), Cardano, Chainlink, and Avalanche. If you hold any of these tokens, you can rest assured that the regulatory issues have been addressed and your token falls under the commodity category. The problem arises when you look at companies outside this list. Take Solana, for example; while it's on the commodity list, it exists in a gray area. Its inclusion is due to an explanatory document, which is essentially a regulatory opinion. An explanatory notice is essentially a statement issued by the SEC and CFTC clarifying "our interpretation of existing law." These notices have some influence, and the market will react to them, but they do not have any legislative force. The next SEC chairman could issue a new interpretation, changing Solana's commodity status overnight without congressional approval or a vote. Another group to watch closely is all those who haven't yet issued tokens. Under this bill, all new tokens are presumed to be securities from the day they are created, and circumventing this presumption means disclosing information to the SEC, filing legal documents, and conducting semi-annual reports for several years. Meanwhile, you also have to work towards reaching maturity. Hiro Systems is one of the few projects that attempted to go through the SEC's existing registration process, spending over $15 million on compliance and legal defense alone—more than they raised in their offering. This gives you a clearer picture of the true costs. The bill limits the amount of money you can raise to $50 million during the maturity phase of a blockchain project. However, the compliance infrastructure required to operate within this exemption is so expensive that only teams with venture capital backing and law firms can truly utilize it. This means that if you're a small team trying to develop a new product without institutional support, you'll struggle to pass this test. Grassroots community-driven projects like Ethereum in 2014, where anyone could participate in $18 million in funding without regulatory scrutiny, would be illegal under this framework. The almost-failed DeFi safe harbor: Product categorization and decentralized testing have captured everyone's attention. But the provisions in Sections 309 and 409 regarding the DeFi developer safe harbor are perhaps the most important part of the bill. The bill stipulates that if you write smart contract code, run validators, or build self-custodied wallets, you are not a financial intermediary. You do not need to register as a broker, you are not a remittance institution, and the government cannot hold you accountable as a remittance institution. Code is not equivalent to custody. This is now enshrined in the bill. This achievement is thanks to a man named Roman Storm. Storm developed Tornado Cash, an Ethereum-based privacy tool. He does not hold anyone's funds, cannot freeze or reverse transactions, and cannot even shut down the protocol if he wanted to. The code is open source and can run independently. Nevertheless, the U.S. government convicted him in August 2025 of operating an unlicensed remittance business because the law at the time did not distinguish between writing software and operating a remittance business. But this protection still has significant problems. During the committee vote, a temporary amendment changed the wording regarding when developers would still be subject to regulation. The new amendment stipulates that the safe harbor provisions do not apply if you control the protocol based on an agreement, arrangement, or understanding. This means that token holders who regularly vote on upgrades and treasury decisions on protocols like Aave or Compound can now easily be interpreted as having entered into some kind of "agreement," which alone is enough to strip protection from everyone building on these protocols. The safe harbor provisions cover the backend, smart contracts, validators, and node operators, but not the frontend interface. Almost no one interacts with DeFi directly through smart contracts; they use websites like app.uniswap.org or app.aave.com. If regulators determine that running these frontends constitutes operating financial services, then the safe harbor provisions only protect the code, not the actual product used by users. This could very well become the next major regulatory challenge in the DeFi space. “If this bill doesn’t work for decentralized finance (DeFi), it doesn’t work at all,” said Jack Chervinsky, who runs the Center for Hyperliquidity Policy. This is true, because if the wording of the bill remains unchanged, the safe harbor provisions, while protecting developers on paper, actually expose them to risk. Warren also attempted to pass an amendment that would have given the Treasury Department the power to sanction DeFi protocols, as it did with Tornado Cash in 2022. The amendment was rejected by a vote of 11 to 13, with all Republicans voting against it. It remains unclear whether the government has the legal right to approve software that is not controlled by anyone. This issue will ultimately go to court. Lawyers defending DeFi protocols can then cite this vote, pointing out that Congress had previously debated this issue and decided that the government should not have this power. This is a powerful argument, stemming from an amendment that was ultimately rejected. Who will win, and what will happen next? However, the biggest winners are the banks. The CLARITY Act effectively repealed SAB 121, eliminating the accounting standard that previously mandated financial institutions treat customers' cryptocurrencies as liabilities on their balance sheets. This was a major obstacle preventing banks from entering the cryptocurrency custody space. Now, all large financial institutions can hold Bitcoin and Ethereum without affecting their capital adequacy ratios. Institutional custodians like BitGo and Anchorage can finally transition from simple storage services to building prime brokerage and clearing services with genuine legal support. The theoretical potential market size (TAM) of tokenized platforms is about to become a reality. Currently, market valuations of tokenized assets are still speculative, ranging from $2 trillion to $30 trillion by 2030. These trillions of dollars have been delayed due to the lack of regulated asset trading channels. The Clarity Act cleared this obstacle, building the necessary legal bridge for institutional capital to cross the chasm. But the most noteworthy change lies in the interaction between this act and the GENIUS Act. Because the stablecoin act prohibits passively holding USDC and earning yields, you can no longer simply deposit USDC on an exchange and earn a 5% yield. Now, yields require active participation—staking, governance, or providing liquidity. This means that hundreds of billions of dollars that were previously idle are now being channeled to structured DeFi protocols such as Pendle, Morpho, and Maple Finance. Legislators may not have intended to force a massive migration of funds to the DeFi space, but they have effectively achieved this by making passive holding unprofitable. The Clarity Act is far superior to previous versions. The previous version dragged on for a decade, was rife with legal uncertainty, and the government's approach to regulating cryptocurrencies was not rule-making, but rather litigation. However, this act is also clearly influenced by existing companies. The compliance costs, the four-year timeframe, and the legal infrastructure required to use exemptions all benefit projects with funding and legal teams. If you're Coinbase, this is the framework you've always dreamed of. If you're developing the next generation of products, the rules are already in place before you even get involved. Regulation has always worked this way. Whether cryptocurrencies are destined to become like this is something we cannot say for sure at this point.
Brian
Alex
Miyuki
Weiliang
Weatherly
Anais