CLARITY Act
Rules & Regulations

The Digital Asset Market Clarity Act is a U.S. federal crypto market structure bill designed to finally answer one core question:  When is a digital asset regulated by the SEC, and when is it regulated by the CFTC?

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Right now, crypto regulation in the U.S. happens mostly through enforcement, not rules. The CLARITY Act aims to replace ambiguity with statutory definitions, reduce lawsuits, and give companies a path to compliance.

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Why It Exists (The Problem It Solves)

Today:

• The SEC claims many tokens are securities

• The CFTC claims authority over commodities and derivatives

• Projects don’t know which rules apply

• Enforcement happens after products launch

The CLARITY Act:

• Defines what a “digital commodity” is

• Defines what a “digital asset security” is

• Assigns clear regulatory ownership

• Creates a safe compliance pathway for token projects

Who It Applies To (Very Important)

The Act applies to any entity involved with digital assets in the U.S., including:

1️⃣ Token Issuers

• L1 / L2 blockchains

• Tokenized platforms

• DAO-issued tokens (yes, explicitly)

2️⃣ Crypto Platforms

• Exchanges

• Brokers

• Custodians

• DeFi frontends with control or fees

3️⃣ Infrastructure Providers

• Wallet providers

• Validators with economic control

• Staking-as-a-service platforms

4️⃣ Investors & Funds

• Venture funds

• Crypto hedge funds

• Token market makers

If you touch issuance, trading, custody, or governance, you’re in scope.

SEC vs CFTC: The Core of the Act

SEC Jurisdiction (Securities)

A digital asset is treated as a security if:

• There is ongoing managerial control

• Token holders expect profits from others’ efforts

• The network is not sufficiently decentralized

This preserves the Howey Test, but codifies when it no longer applies.

CFTC Jurisdiction (Digital Commodities)

A token becomes a digital commodity when:

• The network is functionally decentralized

• No single party controls governance or economics

• The token is primarily used for consumption or utility

Once classified:

• Spot markets fall under CFTC oversight

• Derivatives already fall under CFTC (status quo)

The “Decentralization” Standard (Critical)

The CLARITY Act introduces a legal decentralization test, including factors like:

• Governance distribution

• Validator independence

• Token supply concentration

• Ability of founders to unilaterally change protocol rules

This is huge — it’s the first time decentralization is formally recognized in U.S. law.

Registration & Compliance Requirements

For Digital Commodity Platforms (CFTC)

• Register as a Digital Commodity Exchange

• Market integrity rules

• Custody and segregation standards

• Anti-fraud and anti-manipulation controls

For Securities (SEC)

• Traditional securities registration

• Disclosure obligations

• Ongoing reporting (until decentralization achieved)

Safe Harbor & Transition Relief

One of the most important parts:

• Projects get a grace period to decentralize

• Good-faith compliance efforts matter

• Clear pathway to “exit” SEC oversight once decentralized

This is designed to stop the “launch first, get sued later” problem.

What the Act Does Not Do

• ❌ Does NOT legalize all tokens

• ❌ Does NOT remove anti-fraud authority

• ❌ Does NOT preempt state money transmitter laws

• ❌ Does NOT weaken AML / sanctions rules

This is market structure clarity, not deregulation.

Current Status (Plain English)

• Introduced in the U.S. House

• Strong Republican support

• Growing bipartisan interest

• Closely aligned with FIT21 and other crypto bills

• Likely to move in stages rather than all at once

It is not law yet, but it is direction-setting.

Why This Matters to You (Strategic Take)

If you are:

• Building a crypto product

• Investing in tokens

• Running a compliance platform

• Structuring a DAO

• Designing tokenomics

…this Act tells you what regulators will care about for the next decade.

Founder / Compliance Reality Check

If CLARITY passes, companies will need:

• Token classification analysis

• Decentralization evidence

• Governance documentation

• Regulatory posture mapping (SEC → CFTC)

This is exactly why crypto compliance tooling and AI-driven regulatory classification are becoming valuable.

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Rules And Regulations

Below is a straight, rule-by-rule breakdown of the Digital Asset Market Clarity Act (CLARITY Act) — focused only on the rules and regulatory requirements, not background or politics.

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This is written the way a regulator, auditor, or compliance officer would structure it.

Digital Asset Market Clarity Act

Rules & Regulatory Requirements

1. Asset Classification Rules (Core Rule Set)

1.1 Digital Asset Security (SEC Jurisdiction)

A digital asset is regulated as a security if any of the following apply:

• Issuer or affiliated group:

  • Exercises material control over the network

  • Can unilaterally change protocol rules

  • Controls governance outcomes

• Token holders reasonably expect profits from:

  • Issuer development

  • Managerial or entrepreneurial efforts

• Network is not functionally decentralized

Result:
→ Full SEC securities laws apply
→ Registration or exemption required

1.2 Digital Commodity (CFTC Jurisdiction)

A digital asset qualifies as a digital commodity when:

• No single entity controls:

  • Governance

  • Validator set

  • Token supply economics

• Network operates independently of original issuer

• Token is primarily used for:

  • Consumption

  • Network access

  • Utility functions

Result:
→ CFTC oversight for spot markets
→ SEC authority ends (except fraud)

2. Decentralization Determination Rules

The Act creates a legal decentralization test, based on objective factors, including:

Governance

• Token voting distribution

• Presence of veto rights

• On-chain vs off-chain governance

Control

• Founder or foundation privileges

• Admin keys or kill switches

• Upgrade authority

Economics

• Token concentration

• Vesting schedules

• Insider allocations

Operations

• Validator independence

• Infrastructure ownership

• Ability to censor transactions

Rule:

Decentralization must be demonstrable and sustained, not aspirational.

3. Registration Rules

3.1 Digital Commodity Exchanges (CFTC)

Platforms trading digital commodities must:

• Register with the CFTC

• Comply with:

  • Market integrity rules

  • Anti-manipulation controls

  • Surveillance and reporting

  • Custody segregation

  • Conflict-of-interest controls

3.2 Broker / Dealer / Custodian Rules

Entities that:

• Facilitate trades

• Hold customer assets

• Provide staking or yield services

Must:

• Register with appropriate regulator

• Maintain customer asset segregation

• Provide disclosures on risks and fees

4. Issuer Disclosure Rules

While Asset Is a Security

Issuers must disclose:

• Token economics

• Governance structure

• Control rights

• Risk factors

• Use of proceeds

Upon Decentralization

Issuers may file to:

• Exit SEC reporting obligations

• Transition to CFTC-only oversight

5. Safe Harbor & Transition Rules

The Act provides conditional safe harbor for early-stage projects:

• Temporary SEC relief while decentralizing

• Good-faith compliance required

• Ongoing disclosures during transition

• Failure to decentralize → full SEC enforcement

No blanket amnesty — compliance effort must be provable.

6. Anti-Fraud & Market Abuse Rules

Regardless of classification:

• Fraud

• Manipulation

• False disclosures

• Wash trading

• Insider trading (where applicable)

→ Remain illegal
→ Enforced by SEC, CFTC, DOJ

7. DeFi-Specific Rules

DeFi platforms are not exempt if they:

• Control front-end access

• Collect fees

• Retain admin privileges

• Influence governance outcomes

Rule:

“Decentralized” in name ≠ decentralized in law.

8. DAO Treatment Rules

DAOs are treated as:

• Issuers

• Operators

• Governance bodies

If they:

• Control treasury

• Vote on protocol changes

• Issue tokens

DAOs must:

• Identify responsible parties

• Maintain compliance documentation

• Meet decentralization thresholds

9. Custody & Asset Protection Rules

Custodians must:

• Segregate customer assets

• Prevent commingling

• Maintain insolvency protections

• Provide proof of reserves or equivalent controls

10. What the Act Explicitly Does NOT Change

• ❌ AML / KYC obligations

• ❌ Sanctions compliance

• ❌ State money-transmitter laws

• ❌ DOJ criminal authority

• ❌ Consumer protection laws

11. Enforcement Structure

Area                                                                               Authority

Securities issuance                                                  SEC

Digital commodity spot markets                          CFTC

Derivatives                                                                  CFTC

Fraud                                                                             SEC / CFTC

Criminal violations                                                    DOJ

12. Compliance Artifacts Companies Will Need

If enacted, companies should expect to maintain:

• Token classification memo

• Decentralization assessment

• Governance documentation

• Control & admin key disclosures

• Exchange registration evidence

• Ongoing monitoring logs

Bottom Line (Regulatory Reality)

The CLARITY Act does not reduce regulation — it:

• Replaces ambiguity with structure

• Forces early transparency

• Rewards real decentralization

• Penalizes “fake DeFi”

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Who it applies to and the Penalties

Below is a precise, enforcement-oriented answer covering (1) who the CLARITY Act applies to and (2) penalties for non-compliance — written the way regulators, investors, and risk committees look at it.

Digital Asset Market Clarity Act

Who It Applies To & Penalties

1️⃣ Who the CLARITY Act Applies To

The Act applies to any person or entity that issues, trades, intermediates, controls, or materially influences digital assets in the United States.

This includes U.S. entities and non-U.S. entities with U.S. nexus.

A. Token Issuers (Highest Exposure)

Applies to:

• Blockchain foundations

• Protocol developers

• DAO treasuries

• Tokenized platforms

• Layer 1 / Layer 2 networks

If you:

• Issue a token

• Allocate tokens to insiders

• Retain governance or admin control

• Influence protocol upgrades

➡️ You are in scope.

Regulatory exposure

• Initially regulated by the Securities and Exchange Commission

• May transition to Commodity Futures Trading Commission once decentralized

B. Crypto Trading Platforms

Applies to:

• Centralized exchanges

• Decentralized exchanges with controlled frontends

• Brokers and OTC desks

• Market makers

If you:

• List tokens

• Match trades

• Collect trading fees

• Provide liquidity services

➡️ You are in scope.

C. Custodians & Asset Service Providers

Applies to:

• Crypto custodians

• Wallet providers with control

• Staking-as-a-service platforms

• Yield or lending platforms

If you:

• Hold customer assets

• Control private keys

• Pool customer funds

➡️ You are in scope.

D. DeFi Platforms (Conditional but Explicit)

DeFi is not exempt if there is:

• Admin key control

• Fee extraction

• Governance influence

• Frontend access control

“Decentralized” in marketing ≠ decentralized in law

If any control exists → regulated entity

E. DAOs (Explicitly Covered)

DAOs are treated as regulated persons when they:

• Issue governance or utility tokens

• Control protocol parameters

• Manage treasuries

• Vote on economic changes

DAO participants may be treated as:

• Issuers

• Operators

• Control persons

F. Investors, Funds & Market Participants

Applies to:

• Venture capital funds

• Crypto hedge funds

• Token funds

• Family offices

If you:

• Participate in token distributions

• Influence governance

• Engage in market-making

➡️ Subject to anti-manipulation and disclosure rules

G. Foreign Entities (Extraterritorial Reach)

Non-U.S. entities are covered if they:

• Serve U.S. users

• List tokens tradable by U.S. persons

• Market into the U.S.

• Have U.S. infrastructure or counterparties

2️⃣ Penalties Under the CLARITY Act

The CLARITY Act does not reduce penalties — it clarifies which penalties apply and when.

A. Civil Penalties (SEC / CFTC)

Securities Violations (SEC)

Examples:

• Unregistered token offerings

• False disclosures

• Failure to transition properly

Penalties

• Civil fines (often millions)

• Disgorgement of profits

• Interest + penalties

• Injunctions

• Officer & director bans

Digital Commodity Violations (CFTC)

Examples:

• Market manipulation

• Wash trading

• Failure to register an exchange

• Custody violations

Penalties

• Civil monetary penalties per violation

• Trading bans

• Exchange shutdown orders

• Ongoing compliance supervision

B. Criminal Penalties (DOJ)

Certain violations escalate to criminal enforcement by the Department of Justice.

Triggers include:

• Intentional fraud

• Market manipulation

• False statements

• Evasion of regulatory oversight

Penalties

• Criminal fines

• Asset forfeiture

• Prison sentences

• Personal liability for executives

C. Personal Liability (Very Important)

Founders, DAO signers, and executives may be personally liable if they:

• Retain control while claiming decentralization

• Misrepresent token status

• Ignore transition obligations

• Circumvent registration

The “DAO shield” does NOT protect against fraud or control.

D. Failure to Decentralize (Transition Penalty)

If a project:

• Claims intent to decentralize

• Receives safe-harbor relief

• Fails to meet decentralization thresholds

Then:

• SEC jurisdiction resumes

• Retroactive enforcement possible

• Loss of safe-harbor protections

E. Platform-Level Consequences

For exchanges and platforms:

• Forced delisting

• Registration revocation

• Loss of U.S. market access

• Compliance monitors imposed

Bottom Line (Regulatory Reality)

The CLARITY Act:

• Expands accountability

• Clarifies who is responsible

• Does not reduce penalties

• Raises the bar for “decentralized” claims

It rewards real decentralization and punishes control without disclosure.