CLARITY Act stalls as Senate wrangles over DeFi rules

The Senate ended Monday without voting on H.R. 3633, the CLARITY Act, as a dispute over developer protections deepened. Blockchain Association sent Senate leaders an eight-page response on Aug. 3, pushing back against objections from the National Sheriffs' Association.

The trade group argued the July 22 draft does not give decentralized finance platforms, software developers, mixers, or bridges a blanket exemption from anti-money laundering and sanctions laws. It said the bill separates financial intermediaries who control assets from developers who create neutral software.

The sheriffs' group told Senate leaders on July 31 that the developer protections were too broad and could make financial crime investigations harder. It asked lawmakers to remove or narrow Section 10604, which shields noncontrolling developers from being treated as money transmitters.

Blockchain Association rejected that approach. Revenue alone does not determine whether a person is a financial institution under the Bank Secrecy Act, the group said. FinCEN's 2019 guidance ties money transmitter status to a business model's facts and circumstances. FATF guidance focuses on whether a person performs covered functions for another party.

Section 10604 protects a developer who lacks the legal right and unilateral ability to control transactions involving users' assets. The provision leaves laws covering money laundering, wire fraud, sanctions violations, terrorism financing, conspiracy, theft, and aiding and abetting intact, according to the association. A developer who knowingly handles criminal proceeds or controls customer funds could still face prosecution.

The draft also directs the SEC, working with Treasury, to write rules for platforms that are decentralized in name but perform intermediary functions. Blockchain Association said this answers claims that controlled platforms could avoid oversight by calling themselves DeFi.