Clarity Act Under Fire From Law Enforcement Over Oversight Gaps

Four U.S. law enforcement organizations told the Justice Department and the White House that Section 604 of the Clarity Act could create gaps in the oversight of digital asset transactions, according to people familiar with the matter. The disputed provision would clarify that developers who do not hold customer funds are not money transmitters, a protection the groups said may shield facilitators of illicit finance.

Section 604 targets a long-standing question: whether non-custodial software developers need to register as money transmitters. Crypto advocates argue that applying traditional money transmitter rules to code that merely routes transactions would drive open-source projects out of the country. The law enforcement groups see it differently.

In the letter, the groups argued that exempting non-custodial developers from money transmitter rules would remove a key tool for prosecuting platforms that knowingly process laundered funds or evade sanctions. They cited cases where developers designed wallets that directly handled illicit proceeds, even though the developers never held the money. Without a money-transmitter charge, prosecutors would have to rely on statutes with weaker penalties, the groups said.

The warning is the latest hurdle for the Clarity Act. The Treasury Department raised similar concerns during closed-door briefings earlier this year, people familiar with those discussions said. The bill's sponsors have resisted calls to remove Section 604, arguing the exemption is narrowly written and does not protect facilitators.