DeFi Leaders Fear CLARITY Act Could Force Overseas Exodus

DeFi policy experts and industry leaders have expressed significant concerns about the House’s crypto market structure bill, known as the CLARITY Act, just before it is set to face a floor vote. These experts, who have chosen to remain anonymous, believe that the bill, while not explicitly hostile to DeFi, contains flaws that could severely impact the decentralized finance sector in the United States. They argue that if the bill is signed into law, it could force DeFi developers to move overseas, as the compliance requirements would be impossible to meet without sacrificing the sector’s core principles.

DeFi, or decentralized finance, refers to a range of software products on blockchain networks that enable non-custodial and permissionless trading, borrowing, and lending of crypto assets. For example, a decentralized exchange like Uniswap on the Ethereum network allows users to trade any token on the Ethereum blockchain from their own wallets, without disclosing personally identifiable information. The CLARITY Act, however, could change this by forcing decentralized exchanges to behave more like centralized exchanges, such as Coinbase, and placing limits on the tokens that can be traded on their platforms.

In recent weeks, major players in the crypto industry outside of DeFi have advocated for the passage of the CLARITY Act, which aims to establish a framework for creating and trading most digital assets in the United States. DeFi leaders, however, have refrained from supporting this push, as they believe the bill primarily serves the interests of a select few in the crypto industry, rather than the broader community. They argue that the bill would increase compliance costs and create complications for small DeFi startups, while benefiting industry giants like Coinbase or Ripple, which would not face the same level of disruption.

One of the most concerning clauses in the bill exempts DeFi messaging systems from its purview, but only to the extent that these systems facilitate the trade of “digital commodities.” This term, invented in the CLARITY Act, would likely apply to many popular crypto tokens, but not all. Meme coins, for instance, are likely to be deemed “non-commodity collectibles.” If such language became law, DeFi startups would effectively have to implement a de-facto listing process, akin to how centralized exchanges operate, as opposed to allowing users to freely trade any token on the network. This would be technologically infeasible and truly impossible to do, according to industry executives.

DeFi leaders have flagged concerns about this language for months but were rebuffed by Republican House staffers, who said changes to it were impossible. According to these sources, the restrictions had been pushed by traditional finance players, presumably because these entrenched players do not want DeFi platforms encroaching on their core businesses, including the derivatives market. A House Republican aide, however, pushed back on the characterization that such a decision was made at the last minute, stating that it has been a top priority for years that a crypto market structure bill not create changes to the existing regulatory structure for derivatives markets.

Other issues DeFi policy leaders have with the CLARITY Act include its lack of clear, explicit federal preemption, meaning language stating that the federal framework supersedes any state laws that might treat crypto or DeFi differently. Additionally, the bill lacks full-throated protections for the practice of self-custodying digital assets, which is the cornerstone of DeFi. While the right for individuals to self-custody digital assets is explicitly enshrined in CLARITY, U.S. companies, and thus DeFi startups, do not receive the same protection. DeFi leaders worry that the spaces left between these protections could be seized upon by future administrations and regulators who may be hostile to crypto.

With the CLARITY Act set for a vote in the House, and the bill’s language mostly locked in, DeFi policy leaders now say the best hope of remedying these issues is to lobby the Senate, which is currently drafting its own crypto market structure bill. A House Republican aide concurred to some degree, stating that some perceived concerns with the CLARITY Act, including its lack of explicit federal preemption, are important issues that should be worked through in the Senate, once CLARITY passes the House. While many in the crypto industry fear time is already running out in Washington to achieve key legislative goals, DeFi policy leaders argue that being hasty and racing imperfect legislation to the President’s desk could create more problems in the long term. They believe there is still time to get this right and to swing at a pitch that they can really hit out of the park.