Waiting for CLARITY: Policy Disagreements Stall Key Crypto Regulation in US Senate

They warn that the plan would hand the US Treasury Department sweeping authority to black-list blockchain protocols and force Know-Your-Customer (KYC) controls on non-custodial software. The Senate Democrats’ leaked proposal was attacked across social media on Thursday. 

The latest row comes after Republican Senators pushed their Democratic colleagues to begin the bipartisan negotiation process of advancing the CLARITY Act through the chamber. The CLARITY Act previously moved through the House of Representatives, the lower chamber of the US Congress, and is awaiting a vote in the Senate. 

This legislation would provide a comprehensive regulatory framework to govern the crypto industry in the US. It’s a companion to the GENIUS Act, a bill covering stablecoin issuance and regulation, signed by President Trump into law in July.

A splash of cold water 

According to several industry advocates posting on X, the proposal circulated this week among Senate Banking Committee members would authorize the Treasury Department to create a “restricted list” of DeFi applications deemed too risky. US citizens earning revenue from those protocols could face penalties, even if the platforms operate without intermediaries.

Republicans criticized their Democrat colleagues for the move. “The document was not written in legislative text, included multiple incoherent policy ideas, and was not a good-faith effort to engage on market structure,” said Jeff Naft in a statement reported by Politico, a spokesman for Republican Senator Tim Scott, who leads the powerful Senate Banking Committee. 

Industry advocates were quick to suggest that the proposal would make the US less competitive. “The language as drafted, would make compliance impossible, pushing responsible development and the next wave of financial technology offshore,” Summer Mersinger, President of the Blockchain Association wrote on X. She added a chilling scenario for Americans hoping their nation will be the crypto capital of the world that: “DeFi might survive – but it would thrive overseas, not here at home.” 

Trading barbs 

Senate Democrats argue that they remain committed to working with their Republican colleagues to advance the legislation. Jacques Petit, a spokesman for Democratic Senator Ruben Gallego, defended the party’s proposal.

“They asked for paper and substance, and we delivered. They then turned around and leaked our proposal and pretend to be surprised that our parties have policy differences,” the spokesperson said in a statement. 

Some Senate Democrats remain opposed to the current wave of crypto regulation in the US, which has been largely driven by President Trump, who himself is a staunch advocate for the industry. The President’s family business, managed by his sons, has made multi-billion-dollar investments in digital assets. 

Democrat opposition emerged during the initial negotiations related to the GENIUS Act. Senator Elizabeth Warren, who also holds an influential role on the Senate Banking Committee, was a dissenting voice.

In a speech in May, Warren labeled the GENIUS Act “worse than no bill” and warned it would “turbocharge the stablecoin market… enriching Donald Trump” by exposing his crypto ventures to preferential treatment.

Where to next?

Senator Ruben Gallego, one of the Democrats involved in the discussions, said his caucus remains committed to advancing comprehensive legislation. 

In comments made to Politico, the Senator held firm that his party would work with Republicans to advance the CLARITY Act. However, he emphasized that Democrats would stand firm in their position and work to ensure that any legislation receives bipartisan support and consideration.