CLARITY Act Status 2026: What’s in the Pending Crypto Market Structure Legislation

The CLARITY Act crypto legislation—formally the “Comprehensive Legalization and Regulatory Integration for Transparent Yield Act”—represents Congress’s most ambitious attempt to resolve the jurisdictional chaos that has defined digital asset regulation in the United States. The bill passed the House of Representatives in late 2025 and now awaits Senate consideration, where its path forward remains uncertain but consequential.

This analysis examines what we know about the bill’s provisions, what remains subject to Senate revision, and how crypto founders, compliance teams, and legal practitioners should prepare for multiple possible outcomes.

A note on sources: This analysis draws on the House-passed version of the bill, public statements from sponsors and committee members, and CBO preliminary assessments. Some provisions remain subject to amendment, and we have flagged areas of uncertainty throughout.

Key Takeaways

• Current Status (February 2026): The CLARITY Act passed the House in late 2025 and is pending before the Senate Banking Committee, with markup expected in Q2 2026.
• Core Framework: The bill would create a statutory pathway for digital asset networks to transition from SEC securities oversight to CFTC commodities oversight once they achieve “functional decentralization.”
• Jurisdictional Division: The SEC would retain authority over token issuances and centralized projects; the CFTC would gain expanded spot market authority over decentralized digital commodities.
• Implementation Timeline: If enacted as drafted, most provisions would take effect 18 months after signing, with a phased transition for existing projects.
• Senate Outlook: The bill faces substantive opposition on investor protection grounds, making material amendments highly likely before any floor vote.

What Problem Does the CLARITY Act Solve?

The current regulatory framework for digital assets is defined by ambiguity. The SEC claims jurisdiction over most tokens as “investment contracts” under the Howey test (SEC v. W.J. Howey Co., 328 U.S. 293 (1946)), while the CFTC asserts authority over Bitcoin and certain other assets as “commodities” under 7 U.S.C. § 1a(9). Neither agency has clear statutory authority over the full digital asset ecosystem, resulting in:

• Overlapping and sometimes contradictory enforcement actions
• No viable registration pathway for many legitimate projects
• Regulatory arbitrage driving projects offshore
• Prolonged litigation that resolves individual cases without establishing clear rules

The SEC’s 2025 enforcement pullback—settlements down 45% to $808 million, and dismissals in the Coinbase, Binance, and Gemini cases—has reduced immediate litigation pressure but hasn’t resolved underlying legal uncertainty. Chairman Atkins has publicly called for legislative clarity, effectively acknowledging the limits of enforcement-based rulemaking.

The CLARITY Act crypto framework attempts to fill this gap with statutory definitions, clear jurisdictional boundaries, and a formal transition pathway.

What Are the Core Provisions of the CLARITY Act?

1. Statutory Definitions (Title I)

The bill would add definitions to both the Securities Act (15 U.S.C. § 77b) and the Commodity Exchange Act (7 U.S.C. § 1a), including:

• “Digital Asset”: A fungible digital representation of value that is recorded on a cryptographically secured distributed ledger and does not represent a claim on an underlying asset (distinguishing from tokenized securities or stablecoins).
• “Blockchain Network”: A distributed ledger maintained by a decentralized network of validators using a consensus mechanism.
• “Functional Decentralization”: The status achieved when no person or coordinated group exercises material control over a blockchain network’s operation, governance, or associated digital assets. (Specific criteria discussed below.)
• “Digital Commodity”: A digital asset associated with a functionally decentralized network, subject to CFTC jurisdiction for secondary trading.

Notably, the definitions explicitly exclude payment stablecoins already regulated under the GENIUS Act (signed July 2025), avoiding jurisdictional overlap.

2. The Functional Decentralization Test (Title II)

The bill’s most significant innovation is establishing objective criteria for determining when a network has become sufficiently decentralized to warrant different regulatory treatment. Based on the House-passed version, a network qualifies as functionally decentralized when:

Criterion	Threshold	Measurement Period
Token/voting power concentration	No single party or coordinated group holds >20%	Trailing 12 months
Development control	Protocol changes require decentralized governance approval	Ongoing
Operational independence	No issuer maintains information asymmetry enabling Howey “managerial efforts” reliance	Ongoing
Open source requirement	Core protocol code publicly available and auditable	At certification

Important caveat: These thresholds have drawn significant criticism in Senate discussions. The 20% concentration limit and 12-month measurement period are among the provisions most likely to be amended. Some senators have proposed sliding scales based on market capitalization, longer monitoring periods, or “substance over form” discretionary tests. Do not treat these specific numbers as settled law.

3. Jurisdictional Division (Title III)

The bill divides regulatory authority based on a project’s decentralization status:

SEC Jurisdiction (15 U.S.C. § 77e, as amended):

• Initial token offerings and primary distributions
• Secondary trading in tokens that have not achieved functional decentralization
• Digital assets of projects where a central issuer retains material control
• Anti-fraud enforcement across all digital asset markets under 15 U.S.C. § 77q
• Registration and oversight of trading platforms for non-decentralized tokens

CFTC Jurisdiction (7 U.S.C., as amended):

• Spot market trading in digital commodities (functionally decentralized assets)
• Registration of “Digital Commodity Exchanges” (new platform category)
• Anti-manipulation authority for decentralized asset markets
• Oversight of digital commodity custodians and intermediaries
• Derivatives on all digital assets (existing authority retained)

Shared/Coordinated Authority:

• Joint rulemaking on custody standards
• Information sharing requirements for cross-jurisdictional platforms
• Coordinated enforcement referrals

4. The Token Graduation Pathway (Title IV)

The bill creates a formal process for projects to transition from securities to commodities regulation:

1. Certification Application: Project files decentralization assessment with the SEC, including technical documentation of network architecture, token distribution data, and governance mechanisms.
2. SEC Review Period: 180-day review window (extendable once for complex applications).
3. Preliminary Determination: SEC issues approval, denial, or conditional approval requiring remediation.
4. Transition Period: Upon approval, 12-month transition during which both agencies maintain oversight.
5. CFTC Primary Jurisdiction: After transition, secondary trading falls under CFTC authority; SEC retains anti-fraud jurisdiction.
6. Ongoing Monitoring: CFTC conducts annual compliance reviews; re-centralization triggers reversion to SEC jurisdiction.

For existing projects, the bill provides a 24-month window from enactment to file certification applications, during which current enforcement postures would remain in effect (with safe harbor from new enforcement for compliant applications).

5. Registration Alternatives (Title V)

Recognizing that existing SEC registration categories (e.g., Form S-1, Regulation A+) are poorly suited to token offerings, the bill creates:

• Form DA-1: Streamlined registration for digital asset offerings with required disclosures tailored to protocol documentation, tokenomics, and development roadmaps.
• Regulation DA: Exemption framework for offerings under $75 million (comparable to Regulation A+ but with crypto-specific requirements).
• Rule 144DA: Resale safe harbor for restricted tokens after a holding period (6-12 months depending on issuer reporting status).

How Does the CLARITY Act Interact with Existing Frameworks?

GENIUS Act (July 2025)

The CLARITY Act explicitly defers to the GENIUS Act for payment stablecoin regulation. Under the GENIUS Act, stablecoins meeting the 1:1 backing requirement and other conditions fall under a separate prudential framework, not the securities/commodities distinction. The CLARITY Act’s “digital asset” definition excludes these instruments.

For non-payment stablecoins (e.g., algorithmic stablecoins, yield-bearing stablecoins), the CLARITY Act framework would apply, likely resulting in securities classification absent functional decentralization.

OCC Interpretive Letters 1183 and 1184 (2025)

The bill would codify national bank authority to provide digital asset custody services, building on OCC IL 1183 (March 2025) and IL 1184 (May 2025). Key provisions:

• Express preemption of conflicting state custody restrictions for national banks
• Interoperability requirements between bank custody systems and registered trading platforms
• Capital and operational standards for bank digital asset services

For non-bank custodians, the bill creates an optional federal charter as an alternative to state-by-state money transmitter licensing, though state MTL requirements would remain valid absent federal charter election.

Existing SEC Enforcement Actions

Unresolved question: The bill does not explicitly address the status of pending SEC enforcement actions or prior settlements. Congressional intent appears to be prospective application only, meaning existing cases would proceed under current law. However, some practitioners argue that enacted statutory definitions would affect how courts interpret pending claims. This is an area to watch as the bill advances.

State Money Transmitter Licenses

The bill does not preempt state money transmitter licensing requirements for entities that do not elect the federal charter option. Projects and exchanges operating in multiple states would still need to navigate the existing MTL patchwork for non-custody activities.

What Are the Major Senate Concerns?

Based on public statements and committee staff discussions, the following issues are expected to drive Senate amendments:

Investor Protection “Graduation Gap”

Several Banking Committee members have expressed concern that the transition from SEC to CFTC oversight creates a regulatory gap for retail investors. The CFTC’s traditional mandate focuses on market integrity and manipulation prevention, not the disclosure-based investor protection regime characteristic of securities law. Proposed modifications include:

• Mandatory disclosure requirements that persist after graduation
• Private right of action for material misstatements regardless of regulatory classification
• Extended transition periods (24-36 months vs. 12 months)

The 20% Threshold Critique

Critics argue the 20% concentration threshold is both arbitrary and gameable through nominee arrangements or progressive distribution schemes. Alternative proposals include:

• Lower thresholds (10% or 15%) for larger-cap networks
• “Substance over form” discretion for regulators to look through nominal decentralization
• Economic reality tests examining revenue flows and profit participation

CFTC Capacity and Funding

The Congressional Budget Office’s preliminary assessment (not yet finalized) suggests the CFTC would need substantial additional appropriations—estimated at $150-200 million annually—to fulfill its expanded mandate. Senate Appropriations Committee concerns about budget impact may require:

• User fee funding mechanisms (registration and transaction fees)
• Phased expansion tied to appropriations availability
• Reduced scope of CFTC spot market authority

DeFi Protocol Treatment

The bill’s framework assumes identifiable “projects” and “issuers” that can file applications and maintain compliance programs. Fully decentralized protocols with no legal entity present classification challenges. Senate discussions have considered:

• Automatic classification of sufficiently decentralized protocols (no application required)
• Front-end operator responsibility for protocol compliance
• Safe harbors for truly autonomous code (controversial)

What to Do Now: Actionable Guidance for 2026

For Token Projects

Immediate (Q1-Q2 2026):

• Conduct a decentralization audit against the proposed criteria, even if thresholds may change. Document token distribution, governance mechanisms, and development control structures.
• Identify any concentration issues (whales, team holdings, foundation reserves) that would prevent certification under proposed or stricter thresholds.
• If planning a token launch, evaluate whether to proceed under current Regulation D/Regulation S frameworks or delay pending legislative clarity.

Medium-term (Q3-Q4 2026):

• Prepare dual compliance strategies for both SEC (securities) and CFTC (commodities) treatment scenarios.
• Budget for certification application costs, including legal fees, technical documentation, and potential remediation.
• Monitor Senate markup for final threshold decisions before finalizing governance structures.

For Exchanges and Trading Platforms

Immediate:

• Inventory listed assets and assess likely classification under the proposed framework.
• Begin planning for potential dual registration (SEC and CFTC) if offering both pre- and post-graduation tokens.
• Review custody arrangements for compatibility with proposed federal standards.

Medium-term:

• Evaluate the optional federal charter pathway vs. maintaining state MTL registrations.
• Allocate compliance budget for transition—industry estimates suggest $2-5 million for mid-size platforms during the implementation period.
• Engage with industry associations on consensus positions for Senate amendments.

For Investment Funds and Asset Managers

Immediate:

• Assess portfolio holdings for likely classification changes and implications for fund documents, custody, and reporting.
• Review investment mandates—funds restricted to “securities” or “commodities” may face operational complications during transition periods.

Medium-term:

• Coordinate with tax advisors on implications of regulatory reclassification. Note: The bill does not change tax treatment under 26 U.S.C. § 1001, but Form 1099-DA reporting categories (effective for 2025 transactions) may be affected by asset classification.
• Update investor disclosures to address regulatory transition risks.

For Legal Practitioners

Immediate:

• Develop competency in both SEC and CFTC registration and enforcement frameworks—the bill would require dual expertise.
• Begin building template materials for decentralization certification applications (subject to final rule requirements).
• Track Senate amendments closely; small threshold changes have significant practical implications.

Realistic Timeline and Outlook

Milestone	Estimated Timing	Confidence Level
Senate Banking Committee hearings	April-May 2026	High (scheduled)
Committee markup	June-July 2026	Medium
Senate floor consideration	Q3-Q4 2026	Medium (election dependent)
Conference committee (if needed)	Q4 2026 – Q1 2027	Low-Medium
Presidential signature	Q1-Q2 2027	Low-Medium
Rulemaking period	12-18 months post-signature	High (if enacted)
Compliance deadlines begin	2028-2029	Contingent

Assessment: Passage in some form is more likely than not, given bipartisan support in the House and the SEC’s public call for legislative guidance. However, the Senate version will likely differ materially from the House bill, requiring conference reconciliation. The 2026 midterm elections add calendar pressure and political uncertainty. Do not assume passage or specific timing for planning purposes.

Practical Implications

If the CLARITY Act passes substantially as drafted: Projects with genuine decentralization will have a viable path to commodities classification, potentially reducing compliance burdens and litigation risk. However, the transition process will require significant legal and technical resources, and ongoing monitoring obligations will persist.

If the Senate materially strengthens investor protection provisions: The graduation pathway may become more difficult to achieve, and ongoing disclosure requirements may reduce the practical difference between securities and commodities treatment. Projects should not assume that “commodities” classification means minimal regulation.

If the bill stalls or fails: The current enforcement-light environment under Chairman Atkins may persist, but future administrations could resume aggressive SEC action. Projects would remain in regulatory limbo, with litigation risk dependent on enforcement priorities rather than clear rules.

Regardless of outcome: The bill’s framework provides a useful template for how regulators and courts may analyze decentralization even absent legislation. Projects that genuinely achieve the criteria outlined in the bill will be better positioned under any plausible regulatory regime.

Conclusion

The CLARITY Act crypto legislation offers the most detailed and viable framework for resolving the SEC/CFTC jurisdictional dispute that has defined—and constrained—the U.S. digital asset industry. Its functional decentralization test, token graduation pathway, and tailored registration alternatives address longstanding industry concerns about regulatory impossibility.

However, passage is not assured, and the Senate version will almost certainly differ from the House bill in material respects. Industry participants should prepare for the framework’s eventual implementation while maintaining compliance with existing law and monitoring specific threshold decisions that will determine practical applicability.

CryptoLaw.blog will continue to track the bill’s progress, analyze amendments as they emerge, and provide updated guidance on compliance implications. For project-specific advice on how the CLARITY Act may affect your operations, consult qualified legal counsel familiar with both SEC and CFTC regulatory frameworks.

---

This article is for informational and educational purposes only and does not constitute legal advice. Reading this content does not create an attorney-client relationship. Laws and regulations in the cryptocurrency space change rapidly — consult a qualified attorney for advice specific to your situation and jurisdiction. Seth Goettelman is licensed to practice law in Wisconsin and Florida.