Clarifying the CLARITY Act: What To Know About the House Crypto Market Structure Bill and Its Path to Law

For over a decade, regulators, market participants, and Congress have wrestled with the challenge of regulating crypto assets. This relatively nascent asset class, underpinned by novel technology, has been difficult to regulate under existing financial regulatory frameworks. While both the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have issued guidance, brought enforcement actions, and asserted jurisdictional authority, the lack of a unified regulatory framework has resulted in what many stakeholders describe as “regulation by enforcement.” This dynamic has created legal uncertainty, constrained the participation of traditional financial institutions, and pushed innovation abroad.

Recognizing the limitations of the current regulatory patchwork, Congress ramped up its efforts to legislate the crypto asset space. In recent months, draft legislation has taken shape, and Congress has advanced bills that aim to provide clarity on the contentious jurisdictional battle over crypto regulation. In July, Congress passed the Guiding and Establishing National Innovation for U.S. Stablecoins Act of 2025 (GENIUS Act), providing clarity on the issuance and oversight of stablecoins in the United States. The next step is to adopt legislation clarifying the classification and oversight of digital assets more broadly. The House of Representatives sought to achieve this through the Digital Asset Market Clarity Act of 2025 (CLARITY Act or Act). These pieces of legislation, considered together, reflect growing bipartisan momentum, with outsized support from the Trump administration for comprehensive digital asset legislation and a recognition that U.S. competitiveness is only possible with a tailored approach to crypto market regulation.

The CLARITY Act, in particular, seeks to define and rationalize the boundaries of SEC and CFTC jurisdiction, curing a source of significant regulatory friction and legal uncertainty in recent years. With each agency staking expansive claims to digital asset oversight, the resulting turf battle has led to divergent views on how crypto assets should be classified and which rules should apply, especially in the context of capital raising, trading, custody, and decentralized finance. The CLARITY Act attempts to resolve this long-standing dispute by codifying a multi-tiered asset classification framework and assigning regulatory responsibility accordingly.

Recently, the path forward for the CLARITY Act has been muddied. Within days of the CLARITY Act’s passage by the House of Representatives, the U.S. Senate Banking Committee introduced draft legislation that competes with the CLARITY Act. With both bills now sitting before the Senate Banking Committee, the passage of the CLARITY Act is much less certain than originally thought mere weeks ago.

This Advisory (1) provides context for the existing crypto regulatory landscape; (2) summarizes the key aspects of the CLARITY Act if adopted as proposed; (3) discusses important outstanding legislative and policy considerations; (4) places the CLARITY Act in perspective by explaining the political dynamics that gave rise to this legislative initiative and continue to shape the path to enactment; and (5) discusses the opportunities for existing and new participants in the crypto landscape.

This Advisory is part of a series by Arnold & Porter covering the evolution of the digital asset landscape in the U.S. It is the third Advisory specifically covering proposed digital asset legislation. For information about the adoption of stablecoin legislation, please see our What You Need to Know About the New Stablecoin Legislation Advisory, which provides an overview and analysis of the GENIUS Act and describes opportunities for participation in stablecoin.

The Current Crypto Regulatory Landscape

The jurisdictional struggle between the SEC and CFTC over digital asset regulation in the last five years has defined the U.S. crypto regulatory landscape. Under former Chair Gary Gensler, the SEC took the position that the vast majority of digital assets are securities, relying heavily on the Supreme Court’s 1946 Howey test¹ to argue that most token sales constitute investment contracts and, thus, are subject to regulation under the federal securities laws. This interpretation underpinned an aggressive SEC enforcement agenda, with dozens of high-profile enforcement actions against token issuers, exchanges, and service providers. At the same time, the SEC declined to promulgate new rules or formal guidance tailored to digital assets, asserting instead that the existing securities laws are sufficiently clear.² This position has drawn sharp criticism from market participants seeking regulatory certainty.

In contrast, the CFTC expressed a greater willingness to treat certain digital assets as commodities, particularly those that are decentralized and non-profit generating. The CFTC has sought an expanded role in overseeing crypto spot markets and has warned of regulatory gaps that pose risks to market integrity. Currently, the Commodity Exchange Act (CEA) limits the CFTC’s authority over spot commodities to anti-fraud and anti-manipulation jurisdiction. This is in contrast to the agency’s principles-based oversight of commodity futures, options, and swaps and the financial intermediaries facilitating activity in commodity and derivatives markets.

The competing jurisdictional claims have left market participants and crypto developers in a legal gray zone, unsure whether crypto products or services fall under securities or commodities laws. This dynamic has prompted bipartisan calls in Congress to clarify the regulatory perimeter, with lawmakers increasingly critical of the SEC’s reliance on ad-hoc enforcement and the resulting fragmentation of U.S. digital asset oversight. The CLARITY Act represents a legislative response to this regulatory impasse, aiming to establish a durable, statutory division of authority between the two agencies.

Key Aspects of the CLARITY Act

The CLARITY Act seeks to establish a clear regulatory framework for crypto markets and close existing regulatory gaps resulting from regulation by enforcement. At its core, the Act’s principle mechanism to achieve that end is to divide crypto assets into three categories — (1) digital commodities, (2) investment contract assets, and (3) permitted payment stablecoins — and define the regulatory obligations of the CFTC and the SEC based on those categories. The purpose is to separate token-based transactions from the investment contract securities analysis under the Howey test, which ultimately will determine the division of jurisdictional oversight. Further, the Act creates a structured on-ramp for innovation and seeks to provide investor protection.

Defining the Categories of Crypto Assets

The key aspect of the CLARITY Act is the division of digital assets into three distinct categories.

1. Digital Commodities. The Act defines a digital commodity as a digital asset “intrinsically linked to a blockchain system,” the value of which is “directly related to the functionality or operation of the blockchain system or to the activities or services for which the blockchain is created or utilized.” In other words, the digital asset’s value must rely on the blockchain network’s functionality, such as use for payments, governance, access to services, or as incentives. Notably, the Act explicitly excludes securities, derivatives, and stablecoins, among other financial instruments, from the definition of “digital commodity.”

2. Investment Contract Assets. Under the Act, an investment contract asset is a digital commodity that (1) can be exclusively held and transferred peer-to-peer without intermediaries, (2) is recorded on the blockchain, and (3) is sold or transferred, or intended to be sold or transferred, pursuant to an investment contract (i.e., for capital raising). This means a digital commodity sold in a capital-raising context, such as an initial coin offering, is an investment contract asset that is treated as a security and subject to the jurisdiction of the SEC. The Act carves out such investment contract assets from the definition of investment contracts under the U.S. securities laws.

However, the investment contract asset designation is temporary. If and when the digital asset is resold or otherwise transferred by a person other than the issuer or its agent, the digital asset no longer bears status as a security — even if it was first distributed as an investment contract asset. This means that as soon as the digital asset is sold in a secondary market transaction, it no longer meets the definition of an investment contract asset and becomes purely a digital commodity. The Act’s treatment of such secondary market transactions thus provides regulatory clarity for issuers, who are obligated to comply with U.S. securities laws during a capital-raising phase but are divested of such obligations when the tokens circulate and trade post-issuance.

Relatedly, the Act provides a process by which an issuer (or related or affiliated persons) or a decentralized governance system can certify that a blockchain system is “mature” and thus the investment contract asset is no longer subject to regulation as a security. The purpose of establishing maturity is to determine a point at which crypto-project insiders and related or affiliated persons of the issuer are permitted to sell their digital commodities in a secondary market transaction. This is akin to a lock-up period in a traditional initial public offering of securities. To qualify as “mature,” the blockchain system must: (1) be functional for executing transactions, accessing services, or participating in the transaction validation or decentralized governance process; (2) be composed of open-source code; (3) operate upon pre-established, transparent rules; and (4) not be subject to the control of a single person or group, including by holding 20% or more of the tokens.

3. Permitted Payment Stablecoins. A permitted payment stablecoin is a digital asset (1) designed to be used as a means of payment or settlement, (2) that is denominated in a national currency, the issuer of which is (3) subject to regulatory and supervisory authority of state or federal agencies and (4) obligated to repurchase for a fixed amount of monetary value.

CFTC Versus SEC Jurisdiction Under the CLARITY Act

Based upon the three classifications of digital assets, the Act clarifies the regulatory obligations of the SEC and CFTC. Specifically, the Act would grant the CFTC exclusive jurisdiction over anti-fraud or anti-manipulation enforcement in digital commodities, including in cash or spot transactions. It also would require intermediaries handling digital commodities — including the crypto exchanges that currently dominate the market, or other brokers and dealers — to register with the CFTC. As for the SEC, the Act would grant the securities regulator exclusive jurisdiction over issuers and issuances of investment contract assets, including registration and reporting requirements. The SEC also would maintain anti-fraud and anti-manipulation authority over digital commodities transacted on or with an SEC-registered broker, dealer, or national securities exchange.

As for permitted payment stablecoins, issuers would be subject to the supervisory authority of banking regulators. However, both the CFTC and the SEC would maintain anti-fraud and anti-manipulation jurisdiction over transactions on any CFTC-registered digital commodities exchange or SEC-registered platform, respectively.

Regulation of Intermediaries

The Act includes specific provisions for the registration and regulation of intermediaries by both the SEC and CFTC. It mandates that the SEC allow digital commodities and permitted payment stablecoins to be brokered, traded, or custodied by broker-dealers, or through alternative trading systems (ATSs) or a national securities exchange. It also directs the SEC to draft or revise regulations accordingly. Further, it prevents the SEC from barring trading platforms from exemption eligibility solely due to their inclusion of digital assets alongside securities. The Act gives the SEC jurisdiction and rulemaking authority over digital commodity activities by SEC registrants (ATSs and registered intermediaries) exempt from CFTC registration, and directs the SEC to coordinate with the CFTC to harmonize regulatory oversight of broker-dealers operating ATSs.

Additional provisions modify certain existing SEC regulatory oversight, such as requiring the SEC to modernize the recordkeeping requirements for broker-dealers and exchanges to allow for the use of blockchain for books and recordkeeping requirements. Notably, the Act provides for SEC discretion to use its existing exemptive authority and specifically directs the SEC to exempt certain decentralized finance (DeFi) activities. The Act also exempts digital commodities from state-level blue sky laws by classifying them as “covered securities.”

As to the CFTC, the Act provides for the registration and regulation of digital asset commodity exchanges, including compliance with core principles that include listing standards, trade surveillance, capital adequacy, conflicts of interest policies, reporting, and system safeguards.

Digital commodity exchanges may only list digital commodities for which the issuer is in compliance with applicable disclosure rules, including disclosure of relevant source code, transaction history, and digital asset economics. Further, digital commodity exchanges must segregate customer funds, ensure funds are held by a qualified digital asset custodian, provide risk-appropriate disclosures to retail customers, and be members of a registered futures association. The Act further seeks to mitigate conflicts of interest by imposing restrictions on transactions with affiliated counterparties. While exchanges may offer blockchain-based services such as staking, customer participation must be voluntary and cannot be a condition of access.

Similarly, the Act imposes registration and regulation requirements on digital commodity broker-dealers. It requires firms to be registered with the CFTC and satisfy capital, risk management, recordkeeping, reporting, and customer protection standards. Like exchanges, broker-dealers must segregate customer funds, use qualified custodians, and cannot require customers to participate in blockchain services as a condition of access. They must also be members of a registered futures association and comply with its rules. Additionally, all associated persons of digital commodity broker-dealers must be registered.

Finally, the Act seeks to bring commodity pool operators (CPOs) dually registered as investment advisors with the SEC under similar standards in the CEA as dually registered commodity trading advisors. The provisions also authorize the CFTC to issue exemptions to relieve duplicative, conflicting, or overly burdensome requirements.

Other Key Aspects of the Regulatory Framework

Exemption for Small Capital Raises. The Act also creates a noteworthy new offering exemption from registration under Section 4(a)(8) of the Securities Act if certain conditions are met. The exemption would be limited to offerings by U.S.-organized issuers, whose aggregate token sales do not exceed $75 million over a 12-month period, and where no purchaser acquires more than 10% of the total supply in a single offering. However, issuers relying on this exemption would still be required to comply with certain disclosure obligations and, in particular, extensive pre-offering disclosures, including the blockchain’s maturity status; the token’s source code; the transaction history; a description of the launch and supply process, consensus mechanism, and development plan; and disclosure of affiliate ownership and risks. Issuers relying on this exemption must also file semi-annual updates until the blockchain is certified as “mature” under the Act. The exemption structure further supports the Act’s balancing of innovation and investor protection, while shifting long-term oversight of the tokens themselves (after issuance) to the CFTC rather than the SEC.

Exclusion of DeFi Activities. The Act also exempts certain decentralized finance activities related to the operations and maintenance of blockchain networks from both CFTC and SEC regulatory authority. Specifically, a person would not be subject to the Act if they are: (1) compiling or otherwise validating network transactions; (2) providing computational work; (3) providing user interfaces for a blockchain system; or (4) developing a trading protocol or software system, including wallets. However, this exemption would not limit the CFTC’s or the SEC’s anti-fraud, anti-manipulation, or false-reporting authorities.

Custody and Balance Sheet Clarity. The Act also addresses some common concerns raised by financial market participants about custody of digital assets and treatment of digital assets on the balance sheet. The Act requires digital assets be held with a Qualified Digital Asset Custodian, meaning a custodian that is subject to supervision and examination for custody by an appropriate state or federal banking regulator, the CFTC, or the SEC. The Act also discusses how those Qualified Digital Asset Custodians should treat the custodied digital assets. Specifically, the Act prohibits federal regulators from imposing requirements on financial institutions (i.e., banks, depositories, trusts, credit unions, broker-dealers, etc.) that direct them to (1) include customers’ assets as liabilities on their balance sheets and (2) hold additional capital against these assets, except as necessary to mitigate against operational risks as determined by the appropriate federal or state regulator. This provision is intended to align the treatment of digital asset custody with longstanding accounting and regulatory principles for traditional custody services, where customer assets are not considered assets or liabilities of the custodian. It also seeks to prevent overly conservative treatment by regulators that could disincentivize institutions from offering digital asset custody solutions.

Criticisms and Potential Risks

While the CLARITY Act attempts to resolve longstanding regulatory ambiguity, it has drawn criticism from policy experts, investor advocates, and some former regulators who argue that the bill could weaken investor protections and create new systemic risks. Included among the concerns is the opportunity for “regulatory arbitrage.”³ Due to carve out of the investment contract asset category that shifts oversight from the SEC to CFTC after initial fundraising, there is a potential for issuers to recharacterize their initial coin offering assets as commodities by leveraging minimal centralization or functional token features. Other criticisms include that the Act weakens U.S. securities laws and the SEC’s investor protection mandate, and fails to protect retail investors.⁴

The CFTC’s capacity and readiness to assume significantly expanded oversight responsibilities is another area of concern for critics. Unlike the SEC, the CFTC has limited experience supervising retail-facing platforms and intermediaries, and its historical focus has been regulating derivatives markets — not spot commodities where its jurisdictional authority is limited to anti-fraud and anti-manipulation.

The CLARITY Act would require the CFTC to stand up a full regulatory regime for spot digital commodities markets, including exchange supervision, broker-dealer regulation, and disclosure compliance. Former CFTC regulators have commented that the CFTC needs new legislative authority and substantial funding increases to provide core customer protections in the digital asset markets and to enforce new regulatory obligations in the particularly volatile crypto markets.⁵

Finally, while much of the crypto industry has lauded congressional efforts to make a unified regulatory framework for the regulation of crypto, some argue that the Act still leaves key terms and aspects of the framework undefined, creating a legal landscape that will remain uncertain for years and leaving unresolved details open to agency discretion.

Political Dynamics and Path to Law

2022 Draft Legislation

Although the CLARITY Act has a potentially bumpy path ahead to adoption, it emerged as a refined and remodeled successor bill to the stalled 2022 crypto market structure legislation, the Financial Innovation and Technology for the 21st Century Act (FIT21 Act). The FIT21 Act sought the same goals as the CLARITY Act, but did not advance due to several political factors, including the collapse of FTX, midterm elections, and resistance to limiting SEC authority. However, many of the structural elements from the FIT21 Act are maintained in the CLARITY Act, including the classification of tokens into digital commodities and investment contract assets, the expansion of CFTC oversight, and new disclosures for token offerings. Some core aspects that did not make it into the CLARITY Act are (1) detailed retail investor protections; (2) definitions and tests for evaluating “decentralization”; (3) the proposed formation of crypto industry self-regulatory organizations; (4) mandatory joint rulemakings for the SEC and CFTC akin to those mandated by the Dodd-Frank Act; and (5) explicit pathways for digital asset custody by national banks.

Path to Law

On July 17, 2025, as part of “Crypto Week” in Congress and on the heels of the adoption of the GENIUS Act, the House of Representatives passed the CLARITY Act with bipartisan support. Currently, the CLARITY Act sits with the Senate Banking Committee. However, the path to law is unclear as the Senate Banking Committee has since released a discussion draft of the Responsible Financial Innovation Act of 2025 (RFIA). RFIA provides an alternative regulatory framework for digital assets, but with a significantly limited scope and a focus on the SEC’s regulatory authority. Notably, RFIA differs from the CLARITY Act in that it permits the SEC to retain some discretion in its oversight of digital assets by permitting the SEC to determine what “ancillary assets” are not securities.

While the CLARITY Act focuses on “digital commodities” and assigning most of the regulatory oversight to the CFTC — the preference for a substantial majority of the crypto industry — the RFIA focuses on “ancillary assets” and SEC authority. Ancillary assets refer to an intangible, commercially fungible asset, including a digital commodity that is offered, sold, or otherwise distributed in connection with the purchase or sale of a security through an arrangement that constitutes an investment contract. The RFIA instructs the SEC to engage in a number of rulemakings, including the promulgation of Regulation DA to specifically address digital assets. The bill calls for an exemption for the offer and sale of ancillary assets falling under a $75 million gross proceeds per calendar year threshold for a period of four years or 10% of the total dollar value of outstanding ancillary assets as of the date of the offer or sale. It also requires specific disclosures as conditions to meet this exemption under Regulation DA.

The RFIA further directs the SEC to engage in a rulemaking specifying clear criteria and definitions governing the term “investment contract” used across the federal securities laws. This provision provides the first significant challenge to, and a potential change in the use of, the SEC’s tried and true Howey test for defining an investment contract. The RFIA also directs the SEC to modernize its securities regulations for digital asset activities, including provisions governing issuer disclosures and ongoing reporting requirements; custody; transfer agent and recordkeeping obligations; clearing, settlement, and net-capital, and customer protection requirements; and broker-dealer, ATS, and exchange registration and conduct standards.

Right now, the RFIA only focuses on SEC authority over digital assets. It is expected that the Senate Agriculture Committee will introduce draft language to RFIA to address the digital assets in the commodity and derivatives markets with oversight by the CFTC. Much like with the CLARITY Act, it is likely that the Senate Banking and Senate Agriculture Committees will work together to revise the legislation to create a framework covering the broader digital asset markets and reconcile any jurisdictional conflicts between the SEC’s and CFTC’s regulatory authority. Senate Banking Chairman Tim Scott stated that he hopes to have market structure legislation completed by September 30, 2025.⁶

Opportunities for Industry and New Market Participants

Whatever form a crypto market structure bill takes once enacted, it will mark a significant turning point for the development, operation, and regulation of crypto in the U.S. The CLARITY Act, as currently drafted, attempts to provide legal certainty around token classification, capital raising, and post-sale treatment long sought by the crypto industry, all while reducing the risk of regulation by enforcement. Traditional financial institutions stand to benefit from clarified rules for digital asset custody, trading, and registration, opening new avenues for participation in regulated spot markets. Meanwhile, new entrants — from startups to developers — would gain a defined path for token creation and distribution as well as infrastructure development, free from the ambiguity that has historically chilled early-stage experimentation.

However, as we get closer to a final market structure bill, the shape of the legislation ultimately adopted may drastically change from the existing CLARITY Act with the introduction of the RFIA and forthcoming additions from the Senate Agriculture Committee. This presents opportunities for industry, interested parties, and other stakeholders to provide input and advocate for changes in the RFIA discussion draft.

Regardless of the final form a crypto market structure bill takes, it will undoubtedly support the goals of the Trump administration to position the U.S. as a leader and globally competitive jurisdiction for digital asset innovation.

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© Arnold & Porter Kaye Scholer LLP 2025 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.