The Test Under the CLARITY Act: Decentralization Testing of Tokens

Author: Vaidik Mandloi; Source: TokenDispatch; Translation: Shaw, Golden Finance

Just last week, if you asked ten lawyers whether Ethereum is a security or a commodity, you could get as many as twelve different answers, and in the end, you'd receive a consultation bill of fifty thousand dollars. This has been the real situation for those engaged in the crypto industry in the United States.

Regulators have been reluctant to issue clear rules, but afterward, they initiate lawsuits based on post-hoc interpretations, citing non-compliance, leaving the entire industry in a dilemma without clear standards to follow.

During Gary Gensler's tenure as head of the U.S. Securities and Exchange Commission (SEC), the agency launched 88 enforcement actions against crypto projects, 92% of which stemmed from violations related to incomplete registration. In other words, many companies were penalized simply because they failed to register under a regulatory framework that had never been clearly defined.

This approach is extremely absurd; everyone in the industry knows it but feels powerless — the only way to escape this situation is to withdraw from the U.S. market.

However, last Wednesday, the situation took a turn. The U.S. Senate Banking Committee passed the CLARITY Act with a vote of 15 in favor and 9 against. Senator Elizabeth Warren said the bill completely dismantles the securities law system established since 1929. Her statement is partly true: the bill was drafted with extensive input from various industry stakeholders, but such a fundamental regulatory breakthrough should have been implemented years ago.

What substantive changes does the CLARITY Act bring? It establishes a practical set of standards for determining whether tokens are securities or commodities.

All tokens are initially classified as securities by default. If a project raises funds through token sales and promises to use the proceeds for project development, it constitutes an investment contract as defined by the Howey Test, placing it directly under SEC regulation. This rule has existed since the rise of crypto fundraising models and has not changed.

The real breakthrough of the new regulation is: Projects now have a compliant pathway to reclassify. The bill officially establishes mature blockchain standards: if a public chain meets open-source operation, relies on established transparent rules, and no single individual or entity holds more than 20% of the total token supply, the project can submit an application to the SEC to demonstrate it has achieved sufficient decentralization and undergo review.

If the SEC does not raise objections within 60 days, the token can be reclassified as a digital commodity, and regulatory jurisdiction will shift from the SEC to the Commodity Futures Trading Commission (CFTC).

The transfer of regulatory authority from the SEC to the CFTC is significant, as the two agencies have vastly different regulatory models. The SEC treats tokens as stocks, requiring full registration, detailed disclosures, and ongoing financial reporting; whereas the CFTC regards tokens as commodities like oil or wheat, with a more lenient regulatory approach and lower compliance costs, focusing on market fairness rather than restricting market participants. Any project verified through decentralization audits will see a substantial reduction in daily compliance costs.

Projects will have a four-year transition period to complete the shift. Teams can submit a declaration to the SEC indicating their plan to meet mature blockchain standards within four years; as long as they steadily advance decentralization, they can enjoy temporary regulatory exemptions. But if, after four years, decentralization standards are not met, the exemption will be revoked immediately, and the project will fall back under full securities law regulation, with more stringent disclosure requirements than at the initial stage.

Looking at the recently enacted GENIUS Act, the U.S. has established a comprehensive digital asset regulatory framework: stablecoins now have clear regulations regarding reserves, operational licenses, and issuers; various tokens also have clear standards for classification, primarily based on a 20% token holding concentration cap to determine whether SEC or CFTC oversight applies. The impact of this new regulation on existing projects and newly issued tokens is truly worth in-depth analysis.

Grassroots project issuance models are no longer feasible

Major mainstream crypto assets face no pressure from this review. Bitcoin has no single holder approaching 20%, and has long been recognized as a commodity; after Ethereum's merge, there are over 1.07 million validator nodes, making it the most widely distributed infrastructure among all smart contract blockchains.

In a joint interpretive announcement issued in March 2026, the SEC and CFTC officially classified 18 tokens as digital commodities, including Bitcoin, Ethereum, Solana, XRP, Cardano, Chainlink, and Avalanche. Investors holding these assets can rest assured, as their regulatory status is now confirmed and clearly falls within the commodity category.

However, projects outside this list face difficulties. Take Solana as an example: although it is listed as a commodity, it remains in a regulatory gray area, as this classification is based solely on industry interpretive opinions issued by regulators.

Such interpretive notices are essentially official explanations of current laws by the two regulatory agencies, which influence market sentiment and price movements but lack formal legislative authority. The next SEC chair could issue a new interpretive document at any time, without congressional approval or voting, potentially overturning Solana’s commodity classification overnight.

Startups that have not issued tokens yet must be especially cautious. Under the bill, all new tokens are automatically classified as securities from inception. To escape securities regulation, they must submit disclosure materials, legal documents, and semi-annual operational reports to the SEC over many years, while steadily achieving decentralization standards.

Hiro Systems once attempted to complete the full SEC registration process, but compliance and legal costs alone exceeded $15 million—more than the total funds raised by the project.

This illustrates the true compliance costs under the new regulation. Although the bill allows projects in the ecosystem’s transition period to raise up to $50 million without registration, building the full compliance system required is extremely expensive, only affordable for well-funded teams with dedicated legal support.

This means that small startup teams lacking institutional backing will find it nearly impossible to meet these standards. The grassroots issuance model of Ethereum in 2014—community participation, self-led fundraising of $18 million, and no regulatory interference—has now become illegal under this new framework and is effectively extinct.

Almost missed: DeFi safe harbor

While the classification rules for tokens as commodities and the decentralization standards have dominated public discussion, Articles 309 and 409 of the bill, which establish safe harbor provisions for DeFi developers, may be the most critical parts of the entire bill.

The bill explicitly states: Developers writing smart contract code, running validation nodes, or creating self-custody wallets are not considered financial intermediaries, do not need broker-dealer registration, and are not classified as money transfer service providers. The code itself is not equivalent to asset custody, and this principle is now formally written into the law.

This industry-protective clause originated from the Roman Storm case. Storm developed Tornado Cash, an Ethereum privacy mixer. He did not control any user funds, could not freeze or reverse transactions, and had no authority to shut down the protocol—its code was open source and operated autonomously. Yet, in August 2025, the U.S. government convicted him of unlicensed money transfer business, because at that time, the law did not clearly distinguish between software development and money transfer activities.

However, this industry safeguard still has major loopholes. During the committee voting, a temporary amendment was introduced that clarified developers would still need to be regulated if they substantially control protocol operations through agreements, collaborations, or private consensus.

This means that in protocols like Aave or Compound, token holders who participate in governance proposals or treasury decision-making could be deemed to have entered into such “collaborative arrangements.” Merely based on this, all developers working within these protocols could lose their safe harbor protections.

The safe harbor only covers backend infrastructure, smart contracts, validation nodes, and node operators, but does not specify anything about front-end interfaces. Ordinary users rarely interact directly with raw smart contracts; most use official front-end websites like Uniswap or Aave. If regulators determine that operating these front-end interfaces constitutes providing financial services, then the safe harbor only protects the underlying code but not the user-facing applications. This could trigger a major regulatory showdown in the DeFi space.

Jake Chervinsky, head of Hyperliquid Policy Center, said: “If this bill cannot accommodate the DeFi ecosystem, it loses its purpose.” Indeed, if the current provisions are not amended, the safe harbor will only offer theoretical protection; in practice, significant compliance risks remain.

Additionally, Warren proposed an amendment to grant the U.S. Treasury authority to sanction DeFi protocols, mimicking the regulatory actions taken against Tornado Cash in 2022. This amendment was rejected with a vote of 11 in favor and 13 against, with all Republican members voting against.

Whether regulators can lawfully sanction open-source software without a controlling entity remains legally unresolved. This dispute will inevitably lead to judicial proceedings. When that happens, legal teams defending DeFi protocols can cite this voting outcome as evidence: Congress has debated this issue thoroughly and explicitly rejected granting Treasury such sanctions authority. The result of this failed amendment will serve as a key legal basis for industry defense.

利益格局重塑：赢家与后续走向

The biggest beneficiaries of this bill are actually traditional banking institutions. The CLARITY Act officially repeals SAB 121 accounting standards, which previously mandated financial institutions to include customer crypto assets on their balance sheets as liabilities. This accounting rule has long been a major barrier preventing traditional banks from entering the crypto custody space.

Now, major financial institutions can hold Bitcoin, Ethereum, and other assets compliantly without disrupting their capital adequacy ratios. Institutional-grade custody platforms like BitGo and Anchorage can finally move beyond simple asset storage, leveraging comprehensive legal frameworks to offer advanced financial services such as brokerage and clearing.

The asset tokenization sector is also poised for market realization. Industry estimates for the tokenized asset market size in the 2030s range from $2 trillion to $30 trillion. The previous trillion-dollar market size could not be realized mainly due to the lack of compliant trading channels. The CLARITY Act clears this obstacle, building a legal bridge connecting traditional institutional capital with on-chain asset markets, removing the core barrier to capital inflow.

The most notable change is the synergistic effect with the GENIUS Act. Regulations related to stablecoins explicitly prohibit earning passive income from holdings, meaning investors can no longer simply deposit USDC in exchanges and earn 5% annual yields. To earn returns, they must actively participate in the ecosystem—staking tokens, governance, or providing liquidity.

This has led to a continuous influx of hundreds of billions of idle funds into standardized DeFi protocols like Pendle, Morpho, and Maple Finance. While lawmakers did not intend to push massive capital into DeFi, banning risk-free passive holding yields has inadvertently accelerated this capital migration.

Compared to the chaos of regulation over the past decade, the CLARITY Act represents a significant step forward. Previously, the industry was mired in legal uncertainty, with regulators relying on lawsuits rather than clear rules to control the crypto market. But the bill’s provisions reveal clear interests of established industry giants, with conspicuous drafting marks.

High compliance costs, a four-year ecosystem maturation transition, and the need to build a full legal compliance system to enjoy regulatory exemptions—all these thresholds favor well-funded, legally supported projects. For giants like Coinbase, this regulatory framework aligns with their long-standing goals; but for emerging startups, these terms are pre-set before they even enter the market, leaving them with little say.

Regulation has always been like this. Whether the crypto industry should ultimately develop along these lines remains an open question.