Banking groups opposed bill over unacceptable competition to regional lenders
The Clarity Act, which fell 11 votes short of a procedural Senate vote on Tuesday, was designed to establish the first comprehensive regulatory framework for digital assets, eventually helping to widen acceptance of crypto, though its failure represents another potential stumbling block to wider adoption, analysts said. The legislation had been under negotiation for more than a year.
The bill faced several challenges during the negotiation period, including disagreements over language governing ethics rules that would prevent government officials from profiting off digital assets. Crypto advocates failed to win over a bipartisan group of holdouts when the bill reached the Senate floor.
In a market reaction to the stalemate, bitcoin fell to a near four-week low after the procedural vote failed. After rallying to highs of $82,000 earlier in the month, bitcoin traded around $77,400 on Friday, with other cryptocurrencies also treading water amid the lack of regulatory clarity and the Federal Reserve’s rate hike on Wednesday.
The focus now shifts to federal regulators who are working on their own frameworks to develop industry regulation and have expressed willingness to accommodate crypto products in the mainstream financial system. Last month, the Securities and Exchange Commission proposed rules that would allow startups to raise money through tokens without triggering securities regulation. The chair of the Commodity Futures Trading Commission has also said he plans to direct agency staff to propose and codify rules for digital assets using the agency’s existing authorities.
Those agency-led efforts will press ahead now that the Clarity Act has stalled and together could achieve much of what the legislation sought to, analysts said. But while a federal statute would be harder to alter, rules issued by agencies are easier for new administrations to change.
“Agency-led rules and guidance remain constrained by existing law and can be revised by future administrations or challenged in court,” said David Scheuermann, an investment analyst at Swiss crypto group Sygnum Bank.
That uncertainty will make life more difficult for crypto-linked companies, said Gracy Chen, chief executive of crypto exchange Bitget.
“Building against rules that could change under a future administration is a very different investment decision from building against legislation,” Chen said. “Firms will still invest in the U.S., but will do it more cautiously.”
Still, agency-led regulation, rather than a Congress-led market-structure framework, won’t change the direction of travel for the crypto industry, said Geoff Kendrick, head of digital assets research at Standard Chartered.
“For most of the rules that matter for traditional finance, the agencies can probably get them done,” Kendrick said.
Among those objecting to the Clarity Act were banking groups, who argued that allowing digital tokens to pay interest-like rewards would present unacceptable competition to regional lenders.
The bill is unlikely to return to the Senate before the midterm elections. Its odds could become worse after the elections if Democrats gain control of the House, increasing their leverage and making it unlikely that the party would agree to the bill or any similar piece of legislation without significant concessions.
In a Monday speech ahead of the Clarity Act vote, SEC Chairman Paul Atkins urged lawmakers to pass the bill but signaled that crypto regulation was coming regardless of whether Congress acted. Atkins said his agency was working to “give crypto assets a long-term home in the United States.”
“With or without that legislation, this administration will deliver for American investors and technological innovators,” Atkins said.
Despite the Clarity Act’s stumble in the Senate, regulatory progress continued apace this week. The SEC said it would allow trading venues to offer tokenized stocks, through which traditional assets are traded on digital ledgers known as blockchains.