Inside the CLARITY Act: How the SEC and CFTC Will Divide Digital Asset Jurisdiction

Introduction

The upcoming January 2026 Senate markup of the CLARITY Act is only the beginning of a long U.S. crypto regulation process, not the end. While David Sacks framed the markup as “finishing the job,” the piece stresses that the bill still faces a Senate floor vote, reconciliation between Banking and Agriculture Committees, conference negotiations, a presidential signature, and then an 18‑month rulemaking gauntlet. Key statutory terms—like what constitutes a “security,” and how much DeFi infrastructure falls inside the regulatory perimeter—remain in bracketed text, underscoring how unsettled U.S. digital asset legislation really is.

Substantively, the CLARITY Act would divide crypto assets into three main buckets: “digital commodities,” “investment contract assets,” and “permitted payment stablecoins.” Under this framework, the CFTC would gain primary jurisdiction over digital commodity spot markets, while the SEC would retain authority over issuers and offerings of investment contract assets, at least at issuance. Banking regulators would supervise stablecoin issuers under the GENIUS framework. The bill also creates new regulated entities—digital commodity exchanges, brokers, dealers, and qualified digital asset custodians—with strict requirements around disclosures, surveillance, custody, and recordkeeping, including rules meant to modernize how blockchain data is used as books and records in U.S. crypto markets.

However, the most contentious area—DeFi regulation and retail investor protection—remains largely unresolved. Entire DeFi sections in the Senate Agriculture draft are still bracketed and marked “seeking further feedback,” reflecting fears that too-broad exemptions could trigger a “retail protection collapse,” while overly narrow rules could push protocols offshore. Politics add further uncertainty: Democrats are wary of expanded presidential control over independent agencies like the SEC and CFTC, and legal analysts warn of potential regulatory arbitrage if investment contract assets slip from SEC to CFTC oversight without matching resources. Even if the CLARITY Act passes, regulators will have 360 days to 18 months to write detailed rules, during which today’s crypto market structure will coexist with partially implemented law—meaning the January markup is just the start of a prolonged, high‑stakes crypto rulemaking saga.

Background

The announcement that the U.S. Senate will take up a January 2026 markup of the CLARITY Act has generated a wave of optimism across the crypto, DeFi, and broader fintech ecosystem. David Sacks framed it as “finishing the job” on U.S. digital asset regulation. In reality, the markup is the beginning of a long, technically complex process—not the end.

The CLARITY Act, which already passed the House alongside the GENIUS stablecoin bill, is now parked in the Senate Banking Committee. There, two separate Senate drafts (Banking and Agriculture) must be merged before any formal markup can even occur. Critical questions—such as what qualifies as a security, how far the DeFi regulatory perimeter should extend, and how intrusive reporting for trading venues will be—are still unresolved and literally appear in the draft as bracketed text.

For DeFi builders, exchanges, stablecoin issuers, and fintech teams, it’s important to treat January as the start of a multi‑year U.S. crypto regulation pipeline. The real-world impacts—licensing requirements, custody standards, disclosure templates, and enforcement priorities—will be defined over 12–18 months of rulemaking and litigation, not in a single committee session.

1. What a January “Markup” Actually Means

A markup is a working session in which a committee debates and edits bill text before voting on whether to send it to the full chamber. It is not a final vote, nor is it binding on agencies or markets.

For the CLARITY Act, the pipeline looks roughly like this:

1. Merge Senate drafts

• Senate Banking and Senate Agriculture must align their versions. Today, their texts still contain bracketed sections covering:

  • Definitions of “security” and “investment contract assets.”

  • The scope of DeFi regulation (what is “decentralized enough”).

  • The breadth of reporting and surveillance obligations on venues.

2. Committee markups

• Each committee marks up and votes on its version. This is where you can expect amendments focused on:

  • Retail investor protection.

  • Executive control over the SEC and CFTC.

  • The strength (or weakness) of DeFi carve-outs.

3. Senate floor vote

• Leadership must find 60 votes in a divided chamber. This is not guaranteed, especially with crypto policy increasingly linked to broader partisan fights over financial regulation and presidential power.

4. House–Senate reconciliation

• Differences between the House-passed CLARITY Act and the final Senate version get resolved, either in a formal conference committee or by one chamber accepting the other’s text.

5. Presidential signature

• Only at this point does the CLARITY Act become law.

6. Rulemaking: 360 days to 18 months

• The bill gives the SEC, CFTC, and banking regulators around 360 days, and in some cases up to 18 months, to write the detailed rules.

• During this period, market participants will be operating in a hybrid environment, where legacy practices coexist with partially implemented U.S. crypto law.

Outside precedence from Dodd–Frank, MiFID II, and the EU’s MiCA regulation suggests that this rulemaking phase is where most of the operational burden and practical detail emerges, rather than in the statutory text itself.

2. How the CLARITY Act Reframes Crypto Markets

At a high level, the CLARITY Act tries to answer one of the core questions in digital asset regulation: Which agency is responsible for what? To do this, it divides crypto assets into three main buckets:

2.1 Digital Commodities

“Digital commodities” are tokens tied to blockchain systems—used for payments, governance, or network incentives—that are not securities and not stablecoins. Under CLARITY:

• The CFTC would have exclusive jurisdiction over spot markets in digital commodities, expanding its current anti‑fraud and anti‑manipulation authority into full market oversight.

• Digital commodity exchanges would be regulated similarly to other CFTC‑registered venues, with obligations around:

  • Listing standards.

  • Market surveillance.

  • Systems risk management and safeguards.

  • Data reporting.

This is a major structural shift. Today, U.S. crypto spot markets often live in a gray zone: they implement compliance programs, but there is no comprehensive commodities-market rulebook for non‑derivatives crypto trading.

2.2 Investment Contract Assets

“Investment contract assets” sit at the intersection of securities law and crypto. Drawing heavily on the Howey test (from the Supreme Court’s SEC v. W.J. Howey Co.), the CLARITY framework treats certain tokens as securities at issuance when they are used for capital raising, but then changes their status in secondary trading:

• At issuance:

  • These tokens are securities under SEC jurisdiction.

  • Issuers must follow securities-offering rules (disclosures, registration or exemption, etc.).

• In secondary trading:

  • Once specific conditions are met, the tokens can lose their securities status and be treated as digital commodities.

  • Oversight for their spot trading shifts from the SEC to the CFTC.

Legal scholars and former regulators have flagged this as a potential regulatory arbitrage path: issuers would interact with the SEC only at the fundraising stage, then move retail trading into a CFTC regime that historically has fewer resources and a narrower investor‑protection mandate.

2.3 Permitted Payment Stablecoins

“Permitted payment stablecoins” are fiat‑pegged tokens, usually linked to national currencies like the U.S. dollar, issued by supervised entities. Under CLARITY and the associated GENIUS framework:

• Stablecoin issuers must fit within a banking or banking‑adjacent regulatory perimeter.

• They face capital, liquidity, reserve, and disclosure standards tailored to payment tokens.

• Prudential regulators, not just securities or commodities regulators, have a say over issuance and risk management.

This approach echoes global trends—such as MiCA’s e‑money token regime and the Bank for International Settlements’ guidance on stablecoins—where stablecoins are seen as payment infrastructure, not just speculative assets.

3. DeFi Regulation: The Big Blank Space in the CLARITY Act

The most consequential part of CLARITY for DeFi founders and protocols is, paradoxically, what it does not fully define.

The Senate Agriculture draft leaves entire sections on decentralized finance in brackets, explicitly “seeking further feedback.” The core challenge is familiar from SEC speeches, enforcement actions, and academic work:

When is a system decentralized enough that it should be treated like neutral infrastructure, and when is it effectively operating as a regulated intermediary?

The current ideas in play include:

• Non‑custodial carve‑outs

The bill attempts to exclude activities such as:

• Running validator nodes.

• Operating non‑custodial wallets.

• Developing and publishing open‑source protocol code.

• from being automatically classified as “intermediaries” requiring registration.

• DeFi venue treatment

Where things get hard is with:

• Front‑end teams that run web interfaces into DeFi protocols.

• DAO structures that retain meaningful governance power.

• Protocols with admin keys or upgrade committees.

If the carve‑outs are too broad, regulators and consumer advocates worry about a retail protection collapse: effectively regulated centralized venues might be undercut by minimally regulated DeFi protocols that retail users see as interchangeable.

If they are too narrow, protocols with real potential for transparency and resilience may simply relocate offshore, repeating patterns seen with leveraged trading and derivatives.

Global precedent matters here. EU regulators under MiCA and the UK’s FCA have signaled increasing scrutiny of “DeFi in name only,” especially where a small group of actors effectively controls key protocol parameters. U.S. agencies are watching those developments closely.

4. New Market Plumbing: Exchanges, Brokers, Dealers, and Custodians

Beyond asset classification, the CLARITY Act builds a new layer of licensed crypto market infrastructure:

4.1 Digital Commodity Exchanges

Exchanges listing digital commodities would need CFTC registration and must comply with:

• Robust listing standards (including issuer disclosures and, in some cases, source code access).

• Surveillance and trade monitoring programs.

• Operational risk and cybersecurity safeguards.

• Ongoing reporting to regulators.

For many leading centralized exchanges, this formalizes controls that already exist but are not governed under a single, coherent U.S. statute.

4.2 Brokers and Dealers

“Digital commodity brokers and dealers” would face:

• Capital requirements.

• Recordkeeping and reporting standards.

• Retail customer protection obligations, echoing those in traditional brokerage regulation.

This is particularly relevant for prime brokers, OTC desks, fintech brokerages offering crypto exposure, and API‑driven trading platforms servicing quant and institutional clients.

4.3 Qualified Digital Asset Custodians

Perhaps the most impactful change is on custody:

• Customer digital assets must be held by qualified custodians, supervised by:

  • A banking regulator, or

  • The SEC, or

  • The CFTC.

• Customer property must be segregated from firm assets, aiming to avoid FTX‑style misuse of funds.

• The bill directs regulators to modernize recordkeeping, explicitly allowing blockchain data to function as part of firms’ “books and records.”

The text also restricts regulators from:

• Forcing banks to treat customer crypto as their own balance‑sheet assets, and

• Requiring capital beyond what’s necessary for operational risk.

This is a clear response to concerns raised around the SEC’s Staff Accounting Bulletin 121 (SAB 121), which effectively pushed banks to hold customer crypto assets on balance sheet in a way many saw as a deterrent to institutional custodial services.

5. Politics, Presidential Power, and Litigation Risk

The January markup will not happen in a political vacuum. Several forces are shaping the trajectory of U.S. digital asset legislation:

• Presidential control over agencies

Ongoing legal debates and potential Supreme Court decisions about the President’s ability to fire heads and commissioners of independent agencies like the SEC and CFTC could reshape how “independent” oversight really is. This makes Democrats especially wary of handing a White House (any White House, but particularly one seen as pro‑crypto) too much indirect control over markets.

• Resource mismatch: SEC vs CFTC

Experts and former officials have highlighted that the CFTC, historically smaller and more derivatives‑focused, may not have the budget or headcount to suddenly police every retail spot market in digital commodities. If investment contract assets quickly move out of SEC remit and into CFTC oversight, enforcement could lag.

• Appropriations and staffing

Even if CLARITY passes, Congress must fund a larger CFTC to meet its expanded mandate. Without significant additional appropriations and staffing, much of the envisioned oversight could remain largely on paper.

• Court challenges

Recent Supreme Court doctrine on administrative agency power suggests that any major rulemaking on:

• Token classification.

• DeFi venue treatment.

• Stablecoin prudential standards.

• is likely to face litigation. This is similar to what we’ve seen in climate, banking, and other high‑stakes regulatory areas.

Taken together, the politics point to years, not months, before any stable equilibrium in U.S. crypto regulation is reached.

6. What DeFi and Fintech Teams Should Do Now

Even though the CLARITY Act is not yet law, the direction of travel is clear enough that builders and operators can start preparing.

6.1 Map Your Asset and Business Types

• Classify your tokens and products against CLARITY’s rough buckets:

  • Could any token be an investment contract asset at issuance?

  • Are your core products closer to digital commodities or payment stablecoins?

• Review existing SEC guidance and enforcement trends; they remain highly relevant during the transition.

6.2 Understand Your Likely Regulator

• If your business is spot trading or exchange infrastructure, assume deeper CFTC engagement over time.

• If you’re involved in token issuance or fundraising, the SEC will remain central.

• If you issue or heavily rely on stablecoins, expect banking and prudential regulators to have a louder voice.

6.3 Build for Registered Infrastructure

• Design your systems as if you will eventually be:

  • A registered exchange, broker, or dealer, or

  • Operating through one.

• Focus on:

  • Strong internal controls and surveillance.

  • High‑quality data pipelines and auditability.

  • Clear segregation of customer assets.

6.4 For DeFi: Governance, Transparency, and Exit Paths

• Document governance processes, upgrade paths, and key-holder responsibilities.

• Consider how you would demonstrate decentralization in a way a regulator or court could understand:

• Distribution of control over smart contracts.

• Transparency around admin keys and timelocks.

• Open, verifiable code releases and audits.

• Evaluate whether front‑end operations, oracle management, or treasury functions might be seen as regulated intermediaries, even if the core protocol is permissionless.

7. The Bottom Line: January Is the Kickoff, Not the Finish Line

The January 2026 markup of the CLARITY Act is a genuine milestone in U.S. crypto regulation, but it does not mean the hard work is done. It signals the start of:

• Intensive negotiations over DeFi rules and retail protection.

• A complex division of labor between the SEC, CFTC, and banking regulators.

• An 18‑month rulemaking and litigation cycle that will shape the day‑to‑day reality for exchanges, DeFi protocols, custodians, brokers, stablecoin issuers, and fintech platforms.

For a DeFi or fintech audience, the most productive mindset is to treat CLARITY not as a single event but as the regulatory road map for the next few years. Monitoring committee drafts, participating in comment processes, and proactively upgrading governance, custody, and reporting practices will matter far more than any one headline from January’s markup.

From the market’s perspective, January is not the end of the journey—it is the start of a long, important, and still very open chapter in U.S. digital asset policy.