What to know:
- Blockchain Association says the CLARITY Act safeguards and preserves criminal enforcement powers.
- Sheriffs urge senators to narrow Section 10604 over digital crime investigation risks.
- The draft allocates $600 million yearly for state and local digital asset enforcement.
The Blockchain Association challenged law enforcement criticism of the CLARITY Act in an eight-page letter sent to Senate leaders on August 3. The trade group defended protections for noncontrolling software developers. It said those safeguards preserve criminal and sanctions enforcement.
The response went to Senate Majority Leader John Thune and Senate Minority Leader Chuck Schumer. This response refuted objections raised by the National Sheriffs’ Association on July 31. The sheriffs’ organization was concerned about developer provisions that were excessively broad and might hinder investigations.
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How CLARITY Act Section 10604 Protects Software Developers
This controversy refers to the July 22 draft version of H.R. 3633. The National Sheriffs’ Association requested that lawmakers either remove or limit Section 10604. In addition, it recommended that Congress regulate any entity receiving income from the digital asset market.
The Blockchain Association rejected that standard. It emphasized that generating revenue did not qualify a person as a financial institution under the Bank Secrecy Act. The association noted that the CLARITY Act regulated entities based on the functions performed and control over the customer’s money or transaction.
The association referred to guidance issued by FinCEN in 2019. It states that the determination of the money transmitter status is made through the assessment of each business model on a case-by-case basis. The association added that Financial Action Task Force standards relied on whether a person performs covered services for another party.
Section 10604 would protect a noncontrolling developer from classification as a money-transactioning business solely for writing software. The protection would also cover self-custody tools and technical infrastructure. A person must lack the legal right and unilateral ability to control transactions involving users’ assets.
Why CLARITY Act Backers Reject Claims of DeFi Exemptions
The association claimed that the CLARITY Act does not give a general exception for the DeFi platform, mixer, bridge, or interface. The developers will still be held liable for money laundering, wire fraud, and violations of sanctions. Other statutes related to financing of terrorism, conspiracy, theft, and aiding and abetting will continue to apply.
Under the CLARITY Act, registered brokers, dealers, and exchanges will have anti-money laundering responsibilities. Such responsibilities include customer identification, suspicious activity reporting, record keeping, and sanctions compliance. Nevertheless, the sheriffs believe that the suggested framework will not cover enough digital asset market participants.
The draft also proposes $600 million annually from fiscal 2027 through 2031. State and local authorities could use the money for digital asset investigations, prosecutions, training, and blockchain analytics. The measure would also create a Digital Asset Cyber Innovation Center.
What Happens Next for the CLARITY Act in the Senate?
FinCEN would receive an additional $30 million per year for the next five years. The Blockchain Association said that those funds would add investigatory capacity across multiple jurisdictions. It explained that the CLARITY Act provides new options but preserves existing criminal enforcement options.
The policy exchange occurred in the context of a closing legislative window for the Senate. Senators adjourned on Monday without taking any actions on H.R. 3633. Rather, they invoked cloture on the motion to proceed to H.R. 6500 by voting 89-4 on the motion.
The Senate is on its state work period from August 10 to September 11. No agreement had been announced prior to adjournment on Monday. A schedule, leadership notice, or cloture filing would indicate the next signal for the CLARITY Act.
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