Both Congress in the Clarity Act and the SEC in Regulation Crypto are moving to redefine the playing field for cryptocurrency.  We will address each in a separate statement.

We believe the Clarity Act in the July version is deeply flawed, primarily for four reasons.  First, we are concerned about the breadth of the Ethics Requirements, which read as if they were largely written to authorize billions of dollars of earlier Trump family or Trump organization trades.  Second, we believe that the Clarity Act will not provide clarity and will favor incumbents over new entrants.  Third, we are alarmed by the improbability that the deeply understaffed Commodity Futures Trading Commission is capable of writing the new rules, registering firms, building new systems, and supervising markets to address digital commodities and network tokens.  Fourth, these concerns are amplified by a long list of exemptions to SEC regulation of covered investment contracts, based on network tokens or so-called ancillary assets.

I. THE POROUS ETHICS PROVISIONS

The Senate version of the Clarity Act, in the nature of a substitute for H.R. 3633, 119^th Cong., 2d Sess., was not enacted by the Senate before it adjourned for recess in August 2026.  The 616-page bill was criticized for its failure to address payments to President Trump’s relatives, friends, or companies such as World Liberty and for permitting crypto exchanges to offer stablecoin holders cash back, rebates, and other perks as long as they are not based on a user’s stablecoin holdings.

In late July, Wyoming Senator Cynthia Lummis released the 616-page Senate version of the Digital Asset Market Clarity Act.  The proposed Act combines work earlier done by the Senate Banking and Agriculture Committees, with Lummis emphasizing that the bill represents progress, but there is still a need “to reach a deal in the coming days that will allow this legislation to become law.”

The July version of the Clarity Act is deeply flawed.  Title I, the Lummis-Gillibrand Responsible Financial Innovation Act of 2026, in its current form is opposed by Senator Gillibrand, who has stated that she will not support the bill without an effective Ethics provision.  The Wall Street Journal, among many others, shares this critique.  On July 2, a Journal editorial put matters succinctly: “They are profiting off the Presidency in ways that demean the office.”  The Trump family and “Honest Graft,” Wall St. J. (July 2, 2026).  A 927-page Trump financial disclosure reported that he had earned $2.2 billion from his business interests in 2025, notably including $1.4 billion from crypto.  That same year investors in $TRUMP memecoins saw a 97 percent decline in their market capitalization from a peak price of $75.35 on January 20, 2025 to a range of $1.40-$1.46 on August 14, 2026 while the Trump family earned $636 million from transaction fees.[1]  Thom Aster reported:  “988,905 wallets are underwater.  Combined retail losses $3.81 billion, per Nasen on-chain data reported by CoinDesk.  A Reuters investigation published June 10 found that the Trump family accumulated $2.4 billion in profit from crypto ventures while retail investors absorbed approximately $2 billion in net losses.”[2]  The Journal in August editorialized:  “Mr. Trump’s crypto dealings are an embarrassment.”  The New York Times described a $100 million investment in the Trump family’s World Liberty Financial, with $75 million of this amount distributed to a company controlled by the President and his three sons.[3]

None of this will be addressed by the proposed July Senate bill.  The Ethics Requirements as set out in Sections 30,101-30,106 of the proposed Clarity bill will ban the President, Vice President, members of Congress, federal judges, other covered individuals, and their spouses from issuance or sponsorship of digital assets during their terms in office unless the digital assets are placed in a qualified blind trust or the individual divests the assets or both.  The ban is stunningly porous and does not reach earlier crypto transactions by the Trump family and organizations described earlier.  Moreover, the Ethics Requirements may only be enforced in civil actions by the United States Attorney General and may not be enforced by any state attorney general or any other person.  Why not criminal enforcement as in the federal securities laws or federal criminal laws if the conduct is willful?  Why limit enforcement to the Attorney General of the United States, currently Trump’s former personal attorney, who has been a consistent defender of the President?  The unwillingness to permit litigation by state attorneys general or private litigants precluded those most likely to initiate litigation in this context.  The Act only applies to transactions that occur on or after the effective date of the new Act, which either will be 360 days after enactment or 60 days after publication in the Federal Register of the final rule promulgated under Section 10,102(b).  This means that no challenge can be made to earlier transactions involving Trump or his spouse such as the $1.4 billion received in 2025.  Civil monetary penalties are limited in Section 13,153(c)(2) to “10 percent of the consideration received in the transaction or $500,000, whichever is less.”  And the Ethics Requirements will have a very short life since they are sunsetted and “shall have no force and effect on or after noon on January 20, 2029.”  The Ethics Requirements in the Clarity Act unfortunately are typical of an Act which seems to promise much but snatches away apparent investor protection in the fine print.

The ethics component of the Clarity Act has another significant weakness.[4]  It bars public officials (and spouses) from issuing or sponsoring digital assets while in office but contains a safe harbor with a double loophole.  The safe harbor would permit officials to issue, sponsor, or own digital assets so long as they personally own or control no more than 20 percent, by vote or value, of any class of equity in a business (or its subsidiary) that obtains more than 50 percent of its revenue from issuing or sponsoring digital assets.  Here, unlike the control test for certifying tokens as non-securities, the tests are purely bright-line, formal ones.  A public official, like the Chair of the SEC or the President, could retain a 19.9 percent equity stake in a company (and have other means of influencing or practically controlling its operations) whose entire business is sponsoring tokens—without divesting it or placing it in a blind trust—while personally overseeing crypto regulation.  The same public official could own an outright controlling or even 100 percent interest of a business that “only” derives 49 percent of its revenue from sponsoring digital assets.  Any official bent on corrupt oversight would find it simple to exploit these loopholes.

It is not inconsistent to point out problems with multi-factor standards in the definition of security but also problems with bright-line rules in the ethics safe harbor.  Each weakness is a provision aimed at different goals.  The proponents of the Act promote it as providing clarity for crypto sponsors, which it does not, because of the uncertainty of its self-certification exemptions (discussed below), and for protecting the public interest with ethics limits, which it does not, because of the loopholes it contains.  A better written bill would include clear safe harbors for its scope—using, for example, a more stringent 10 percent ownership safe harbor, rather than the 49 percent factor in the current bill, as federal banking law does bank control—but also more comprehensive bans in its ethics provisions.  There is no good reason to permit ongoing direct ownership of a company that issues tokens for public officials overseeing crypto, when they have a long-accepted alternative of moving all ownership into qualifying trusts.  The only reason to add that double-barreled loophole that we can see is to permit the continued corruption of oversight of the industry, while permitting elected officials to profit from their public roles at the expense of the public interest.

II. THE CLARITY ACT WILL NOT PROVIDE CLARITY AND WILL FAVOR INCUMBENTS OVER NEW ENTRANTS

The Act’s intention is to create clear rules of the road for crypto or digital assets subject to the Commodity Futures Trading Commission, the SEC, or other regulators.  In the broadest sense, a network token is defined as a digital commodity that is intrinsically linked to a distributed ledger system and that derives or is reasonably expected to derive its value from the use of such distributed ledger system.  See Section 20, 201 adding Section 2(k) of the Commodity Exchange Act, which in turn distinguished an ancillary asset which is an investment contract based upon a network token whose value is dependent “upon the entrepreneurial or managerial efforts of an ancillary asset originator or a related person, as those concepts are further specified by the Commission by regulation.”  Ancillary assets and ancillary asset originators are regulated by the SEC.

To put this in simple terms, the Act creates a trifurcation of the regulation of digital assets.

Digital commodities or network tokens alone such as Bitcoin or Ethereum are subject to regulation by the CFTC.

Investment contracts based on network tokens, so-called ancillary assets, are subject to regulation by the SEC.

Stablecoins are excluded from CFTC or SEC jurisdiction and solely subject to banking regulators per the earlier enacted GENIUS Act.

The primary nominal goal of the Clarity Act is to provide clarity about what is and what is not a “security,” long the dividing line between the SEC and the CFTC in overseeing the financial markets.  Critics have attacked the SEC for “regulation [of crypto] by enforcement” because it has not promulgated new definitions for crypto assets and instead has relied on the long-standing court-approved “Howey test”^[5] for “investment contracts” (which are securities) and other kinds of contracts (which are not), because, they said, the test was too fuzzy, unpredictable, or hard to apply.  Most critics did not explain what a better definition of non-securities crypto assets would be, but that critique was and remains common.

It is ironic and noteworthy, then, that the Clarity Act formally relies on precisely the same Howey test in defining which crypto assets remain subject to SEC oversight, and which do not.  Section 10,102 of the Senate mark-up of the Clarity Act bill adds new §4B(a)(1)(A) to the Securities Act to define “ancillary asset” (the category of tokens that remains under SEC oversight) by reference to value that depends on the “entrepreneurial or managerial efforts” of the token’s originator.  That language is directly taken from the Howey test and subsequent case law.  In other words, the Clarity Act will not eliminate the lack of clarity about which tokens are securities and which are not, because the question of “managerial efforts” will remain a fact-based standard almost guaranteeing continued “regulation by enforcement” i.e., some sponsors will claim that their tokens do not depend on their managerial efforts in situations where that claim will be debatable at best.

But the Clarity Act proposes to do worse than preserve arguable fuzziness in current law.  It adds provisions that manage to expand the risk of evasion by fraudsters while simultaneously formally embracing and expanding the likelihood of “regulation by enforcement.”  And, in doing so, it adds procedural requirements that will increase the likelihood of errors in outcomes and favors incumbents over new entrants, thereby weakening competition in the crypto markets that go unregulated by the SEC.  These flaws are embedded in three separate deregulatory self-certification procedures (two for the SEC, one for the CFTC), next discussed, that allow self-interested private parties to simply inform the relevant agency that their tokens are not securities, based on specified facts.

Complete Deregulatory Self-Certification

The Act embraces multiple self-certification methods.  One self-certification^[6]method permits an ancillary asset originator or digital asset intermediary simply to file a writing with the SEC asserting that a token is not an ancillary asset (i.e., a non-security that thus falls outside the SEC’s disclosure regime altogether) which becomes automatically effective.  Once filed, the SEC must issue a notice of intent to deny within 20 business days, which triggers a 10-day comment window for interested persons to comment, after which the filer may request an oral presentation.  Ultimately the SEC votes, and the

Act provides there must be resolution within a 60-calendar day window.  Unlike the act’s CFTC self-certification provisions (described below), there is no provision for the SEC to extend its timetable for complex or novel certifications.^[7]  Given the complexity of many token business models and distribution arrangements, the sharply compressed 60-day overall window—which must accommodate notice, comment, and any hearing back-to-back, with no extension for complexity or novelty—makes it likely that the SEC will make category mistakes on a routine basis, which will then lead to no less litigation than under current law.

Importantly, the law would specifically give rights to sponsors to challenge SEC denials in court.  On the other hand, the Act gives no right to anyone to go to court to challenge SEC approvals,^[8] such as by third-party investors or competitors (who will often have the information and incentives to look for regulatory mistakes).  Because SEC inaction results in approval, third parties may also find an obstacle in challenging outcomes because there is no necessary “final agency action” to ask a court to review.  In addition, asymmetrically, the law would give the CFTC discretionary input rights during the SEC’s review, and the SEC must notify the CFTC of its certifications and final action (but the reverse is not true for the CFTC’s certification process (described below)).  In two ways, then, the law would preserve the need for “regulation by enforcement” in current law but tilt the outcomes against investors and any SEC interested in protecting them.

Deregulatory Self-Certification for Insider Public Offerings

A second, separate SEC deregulatory self-certification that a network of tokens is not under “coordinated control” may be made by an insider or originator.  Such self-certification unlocks that insider’s ability to more freely dispose of her tokens, including in what would otherwise constitute follow-on secondary public offerings.  Such treatment is the direct opposite result of a core anti-evasion consequence of the securities laws deeming a security to be a “restricted” security.^[9]  Simple self-certification is a strikingly different method because of the high level of self-interest on the part of the speaker.

This type of self-certification, too, becomes automatically effective, absent SEC denial, although in this case after 90 days.^[10]  Unlike the CFTC self-certification provisions (described below), there is no provision for the SEC to extend its timetable for complex or novel certifications, and as with the earlier-described certification, SEC denials may be challenged by the sponsor, but the law creates no right for anyone else to challenge an approval or an automatically effective certification.^[11]  Given challenges in assessing “control,” which tends to be highly fact-specific, the short window for regulatory response makes errors likely, which will increase the need for more litigation and “regulation by enforcement.”

Such an error can be readily appreciated by focusing on how the Act directs the SEC to define “coordinated control,”^[12] based on five unweighted indicia, none individually dispositive:

1. Is the protocol/source code freely and publicly available (open-source, on-chain)?
2. Does a controlling person/group have unilateral power to censor or restrict use, or hold hard-coded privileges giving preferential treatment?
3. Does a person/group under common control hold, in aggregate, beneficial ownership of more than 49 percent of outstanding units of the ancillary asset or voting power in its governance system?
4. Has the system not yet reached an “autonomous state,” with a controlling person/group able to unilaterally alter consensus rules?
5. Are the mechanisms meant to drive value accrual to the token not yet functional?

A better prescription for more fact-intensive drawn-out litigation is hard to imagine.  The only bright-line component to this test is the 49 percent ownership test. Even there it embraces a non-formal “common control” component and adds “voting power,” which will complicate some assessments.  And, more generally, we believe that level is too high to reach effective control in a good many instances.  It is true that the SEC is commanded to add safe harbors for these provisions, and those may end up consisting of bright-line elements.  But the SEC already has safe-harbor authority, and its critics have long criticized it for not using that authority.  The act provides no guarantee that the resulting safe harbors will in fact reduce uncertainty over who can rely on the second self-certification process.

Deregulation by the CFTC Alone

The third self-certification process amends Section 5c of the Commodity Exchange Act (CEA) to permit an exchange to instruct the CFTC that a digital commodity meets CEA eligibility criteria and can thus be listed for cash or spot trading.^[13]  Those criteria, again, are not composed of bright-line rules, but of loosely written standards, and do not reflect the investor protection goals of the securities laws, but instead only the market-protecting goals of the commodities laws.  As with the other self-certifications, the CFTC is given a compressed timetable—20 business days in general, or a single business day for a digital commodity that is already certified.  These can be extended by 30 business days up to two times, when there are novel/complex issues.

The criteria to be used by the CFTC are that (a) the commodity is “not readily susceptible to manipulation” and (b) public disclosures required under §4B of the Securities Act (the SEC-side ancillary-asset disclosure regime from Sec. 10,102) have already been furnished to the SEC, or “other similar information” about the distributed ledger system’s ongoing development plan—publicly ascertainable, per CFTC rule—has been made public instead.  We observe that because the applicable criteria are not only sufficiently complex and entail reasonable discretion that disputes are likely to arise in application.  In combination, there is reason to believe they will not create certainty for market actors, will tend to entrench incumbents, and will thereby deter new entrants from competing in the crypto market.

Also notable is that the CFTC’s test is focused solely on transparency and market manipulation and does not include a focus on decentralization—it does not require the CFTC to inquire into whether the network is free of insider control or depends on the managerial efforts of others.  In other words, it neglects the core of the Howey test that the law separately preserves.  Despite incorporating a cross-reference to the SEC’s disclosure regime, the law gives the SEC no approval, objection, comment, or veto role in that CFTC certification process.  While the CFTC’s decisions could, presumably, be challenged in court, there is no statutory role for the SEC in adding its expertise or pursuing its statutory goals in challenging the CFTC’s discretionary decisions in response to self-certifications.  This asymmetry in approach may tend over time to result in more sponsors framing their tokens and networks as commodities, subject only to the CFTC’s jurisdiction, despite nominally including the SEC as a primary regulator of the grey zone between securities and commodities.

In sum, the Clarity Act will not achieve its primary purpose in its primary provisions assigning jurisdiction over crypto—reduction of “regulation by enforcement.”  It will speed up an initial review by regulators but will do so with tests that are likely to generate post-review litigation.  Nor will it reliably cover all but only those activities that amount to selling the public securities in the form of digital assets.  Yet these activities will present the clear risks of fraud and market instability that unregulated securities activity creates.  Instead, it will tilt the playing field in favor of well-funded industry incumbents who will be best positioned to wage the future court battles that the structure of the Act practically invites. It also tilts the playing field against the SEC and actors used to thinking about investor protection as an important public goal, in favor of the CFTC and actors used to taking a “caveat emptor” approach to protecting the public.

III.  THE DEEPLY UNDERSTAFFED CFTC

One reality is already clear about this division of labor.  The CFTC has little capacity to take on many new regulatory functions.  At the end of 2025, its total staff had declined in one year by 21.5 percent to 556.  Only one of its five commissioners is currently in office.  It seeks only 14 new FTE over the FY 2026 baseline.  Under the Clarity Act, if enacted, the CFTC would be required to write new rules, register firms, build systems, and supervise markets.  This is regulation on paper, but not in reality at least for the foreseeable future.  Under the Act, the CFTC and SEC are required to complete rulemaking within one year.[14]  No additional Commissioners are required to be appointed by the Act, but the Act does include a sense of Congress that the CFTC should have at least two of its Commissioners nominated “to carry out existing responsibilities” and those required by the relevant division of the Clarity Act.[15]

IV. THE LONG LIST OF SEC EXEMPTIONS

The rules of the road in the Clarity Act are further complicated by a long series of exemptions.

All offers, sales, or distributions of network tokens that occurred before the effective date of the Clarity Act are not treated as a security under the relevant provisions of the Securities Act, or the Securities Exchange Act, or the Investment Company, Investment Advisers, or Securities Investor Protection acts.[16]

The SEC is required to adopt rules to exempt ancillary assets from the registration requirements of the Securities Act in the offer, sale, or distribution of an investment contract if the offer, sale, or distribution does not exceed the greater of (i) $50,000,000 in gross proceeds per calendar year for a period of not longer than 4 years; or (ii) 10 percent of the total dollar value of those ancillary assets that are outstanding as of the date of that offer, sale, or distribution.  Section 10,103(b)(1)(A) creating proposed Section 4B of the Securities Act.  Liability for disclosures under Section 4B will not be subject to the strict liability provision of Section 11 of the Securities Act but may be subject to Section 12(a)(2).[17]  These parallel the approach recently proposed by the SEC in its crypto asset release.

A sleeping giant of the Act appears in Section 10,108, which authorizes the Commission “to amend, rescind, replace or supplement      . . . each regulation, form, interpretative statement or other requirement within the jurisdiction of the Commission that is not otherwise amended by this division [of the Clarity Act] . . . to the extent that such provision applies to any digital asset activity . . . to the extent that the provision is outdated, unnecessary, or unduly burdensome in light of the unique characteristics of digital assets or substantially similar technology. . . .”  The SEC by this provision is given carte blanche to amend, rescind, or replace any regulatory provision governing under Section 10,108(a)(1):

A. Consumer protection, including custody of digital assets . . .;

B. Transfer agent rules;

C. Books and records, or recordkeeping provisions;

D. Clearance and settlement rules;

E. Broker-dealer, alternative trading systems and exchange rules;

F. Issuers disclosure and ongoing reporting requirements; . . . and

G. The use of vaults, digital asset receipts, or receipts involving substantially similar technology, vault tokens, or liquidity provider tokens.

This means the SEC in effect can take significant regulatory steps with respect to this broad swath of provisions.

Section 18(b) of the Securities Act is amended to largely exempt network tokens from state securities laws and further removes a growing list of products from the protection of state law that historically existed.[18]

Section 10,404 relates back to the earlier enacted GENIUS Act and prohibits the payment of interest or yield “solely in connection with the holding of the payment stablecoins of that restricted recipient.”  The Wall Street Journal opinion, The Crypto Lobby Objects on the Clarity Act (Aug. 6, 2026), was quick to criticize this provision:  “The exchange could, say, offer 5% cash back to stablecoin holders who sign up for a loyalty program and keep a monthly balance of at least $1.  . . .  Under the Clarity Act as we and others read it, stablecoin holders could be compensated with sundry perks including zero-interest loans as long as their deposits aren’t the only reason they are being rewarded.  . . .  Criminals could exploit this exemption to route illicit payments through these networks.”  Six major banking groups including the American Bankers Association rejected this compromise which crypto firms had sought to preserve.

Title VI provides broad exemption to software developers engaged in “(1) Compiling network transactions or relaying, searching, sequencing, validating or acting in a similar capacity.  (2) Providing computational work, operating a node or oracle service, or producing, offering, or utilizing network bandwidth, or providing other similar incidental services.”[19]  Section 15H also adds:  “(3) Developing, publishing or constituting – (A) a distributed ledger system; or (B) software or systems that create or utilize hardware or software, including wallets or other systems, that facilitate the ability of a user to keep, safeguard, or have custody of the digital assets or private keys of the users.”  State securities, commodities, or digital assets laws would be preempted by these provisions.[20]

Section 10,604, the Blockchain Regulatory Certainty Act, exempts non-controlling developers or providers from being treated as engaged in the money transmitting business under 31 U.S. 5330 and 18 U.S. 1960.  “The practical effect is to remove the legal theory under which developers have faced prosecution for writing software they do not control.”[21]  One commenter views this Section as “directly protecting WLFI (that is, the Trump Organization World Liberty Financial) legal standing.”[22]  There is some ambiguity with respect to this provision.  Section 10,604(d) specifically preserves the application of Section 1960(b)(1)(C) that acts with the specific intent to transfer, on behalf of another person, funds that are known by the initial person to be (1) derived from a criminal offense, or (2) intended to be used to promote or support unlawful activity.

Section 11,605, the self-styled “Keep Your Coins Act,” forbids any federal agency from prohibiting, restricting, or otherwise impairing the ability of a covered user to self-custody digital assets in a private self-hosted wallet.  There are limits—self-hosting may not be used for specified unlawful activities such as illicit finance, money laundering, terrorism, or violation of United States sanctions.  But this emphasis on privacy concerns while no doubt heartfelt is for an industry that has been beset by instances of major frauds such as those perpetuated by FTX or billion-dollar illicit activity such as that allegedly perpetrated by North Korea.  A strikingly different approach is taken with respect to digital asset kiosks, which are permitted by Section 11,205 but are required to submit an updated list containing the physical address of each digital asset kiosk owned or operated by the relevant kiosk operator and to provide specified information in a registration statement as a means to help reduce digital asset kiosk fraud.

CONCLUSION

The Clarity Act as drafted is really A Charity Act that benefits earlier and future crypto traders and donors, undermines enforcement through a promiscuous use of self-certification and exemptions, vests excessive tasks on our weakest financial regulator, the CFTC.  The Act should be rejected in its current form.  It will not end regulation by enforcement.  It will invite fraud.

ENDNOTES

[1] Vicky Ge Huang, Amrith Ramkumar & David Umberti, President Scores on Crypto as His Fans Lose a Fortune, Wall St. J. (July 3, 2026).

[2] The Clarity Act:  A 616-Page Gift to the President (July 25, 2026).

[3] Russ Buettner, How Did Failed Retailer Invest $100 Million in Trump Crypto, N.Y. Times (Aug. 10, 2026).

[4] Section 30,101, adding Section 13,152(e)(3)(B) to the Ethics in Government Act.

[5] SEC v. W.J. Howey Co., 328 U.S. 293 (1946).

[6] Section 10102, adding §4B(a)(5).

[7] The 60-day period can be tolled but only during a 3-year sunset window following the Act’s effective date (not a permanent authority) and only on a written showing that the filer itself has not substantially responded to an SEC request for information within a reasonable time, not based on the complexity or novelty of the questions raised.

[8] See Section 4B(a)(5)(E).

[9] The act also adds §4B(d)(3) with third SEC self-certification—”Termination of Requirements”—that lets a private party end periodic disclosure obligations on a 90-day automatic-effectiveness clock, conditioned on a prior §10,104(d) certification being effective.

[10] Section 10,104(d).

[11] See Section §10,104(d)(3)(C).

[12] Section 10,104(b).

[13] New CEA Section 5i(c)(3) (created by Sec. 20,204).

[14] See Section 20,107.

[15] Section 20,107(c).

[16] Section 10,102(k)(3).

[17] Section 10,103(d)(2).

[18] Section 10,108(f), (g).

[19] Section 10,601 adding Section 27C to the Securities Act and Section 15H to the Securities Exchange Act.

[20] See 10,601(g)(1).

[21] Dhara Chavdia & Diva Mistry, Inside the Clarity Act’s 616-Page Merged Text:  What Changed and What Didn’t, Crypto Times (Aug. 7, 2026).

[22] ASTER, supra n. 3.

This post comes to us from the Shadow SEC, whose members are professors John Coates at Harvard Law School, John C. Coffee, Jr. at Columbia Law School, James D. Cox at Duke University School of Law, Merritt B. Fox at Columbia Law School, and Joel Seligman at Washington University School of Law.