The crypto industry today is at an equally important juncture. The House is preparing to vote on the CLARITY Act, a bipartisan bill that would establish a clear regulatory framework for digital assets. While initially garnering support from prominent industry players, the CLARITY Act is now under intense scrutiny from Decentralized Finance (DeFi) policy leaders, who believe the legislation is deeply flawed and could stifle innovation, increase compliance costs, and ultimately push DeFi developers overseas. Concerns have been raised about the Act's language, lack of clear federal preemption, and potential to disproportionately favor large centralized exchanges.
Concerns Over DeFi Definition and Compliance
A major area of disagreement is found in the CLARITY Act’s overly broad definition of, and approach to, regulation of DeFi. Critics have lambasted the Act for forcing decentralized exchanges such as Uniswap to operate in a manner more akin to centralized exchanges, like Coinbase. This change would put significant limitations on what tokens users could trade on their platform. They think this move will go on to redefine the DeFi space as a whole. DeFi as a concept works best when grounded in permissionless innovation and open access.
"Developers of interfaces would be held responsible for monitoring every asset and transaction on the interface to make sure that that asset falls within this very narrow definition of digital commodity," - an industry executive.
The impact of such a requirement would be huge. DeFi startups would have to, in practice, create an indirect listing process, bringing in additional layers of complexity and expense. This would have a detrimental effect on smaller players and discourage innovation within the growing DeFi space.
"That's force-fitting the way we treat centralized entities onto DeFi. It’s technologically infeasible… truly impossible to do," - an industry executive.
The CLARITY Act’s hostile preemption towards state regulation creates significant worry of preemption through conflict with state laws. DeFi enterprises may face havoc over a daunting patchwork of enforcement obligations. Without explicit language affirming that federal regulations supersede any state laws to the contrary, their burden and complication will simply increase.
"When you leave these gaps, you allow future regulators like Gary Gensler to come in," - a DeFi-focused lobbyist.
Impact on Self-Custody and Innovation
One more serious concern is how the CLARITY Act addresses self-custody, a foundational principle of the crypto ethos. The Act offers few protections for users who self-custody their digital assets. This significant gap creates a pathway for future regulatory overreach. This lack of clarity could lead users to shy away from self-custodying assets. It would even further undermine the decentralized character of the industry.
The DeFi ecosystem is built by experimentation and innovation. Without careful consideration of the rules it sets, the CLARITY Act will dampen innovation by imposing excessive and unnecessary burdens. Thus, developers might be incentivized to chase better jurisdictions. This premature move would destroy the US’s competitive advantage in the crypto space. Beyond that, it would similarly sap DeFi’s promise to usher in a new and better financial ecosystem.
"This is a bill written by and for the big companies in crypto, which feels antithetical to the industry," - a policy leader.
Others policy leaders argue that the CLARITY Act only serves to protect the incumbent industry heavyweights such as Coinbase and Ripple. They claim it merely rubber-stamps these companies’ current business models. This has the potential to make this playing field very lopsided, putting up additional barriers to entry that could limit competition from smaller, more innovative companies.
"It pumps one company’s stock price at the expense of leaving developers in the lurch," - a policy leader.
Lobbying Efforts and Future Prospects
DeFi leaders agree that it’s a good thing the CLARITY Act has had public backing from a large share of the best known industry players. They continue to insist that the Act, as drafted, threatens critical regulatory clarity and security for the future of DeFi right here in the US.
Our DeFi policy leaders were met with scorn by Republican House staffers in attempts to navigate these discussions. Now, they’re turning their attention to the Senate. The Senate is currently in the process of drafting its own crypto market structure bill. That creates a perfect chance to address the shortcomings of the CLARITY Act and set up a more balanced and innovation-friendly regulatory framework.
"We can't just say nothing," - a DeFi policy advocate.
The DeFi community has been diligently engaging with senators and their staff. They are urging responsible changes that deepen and protect our core principles of decentralization, self-custody, and permissionless innovation. Their goal is to ensure that any legislation passed by Congress fosters a thriving DeFi ecosystem in the United States.
"All it takes is a lawsuit to cripple a small company," - a DeFi-focused lobbyist.
