From Howey to Hashes: Can the CLARITY Act Decentralize the U.S. Crypto World?

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The obsession with cryptocurrency is simple: investing in crypto is riskier than stocks and bonds. Cryptocurrency eliminates the need of tangible funds to invest in securities and offers more securities through fast and cheap transactions. The technology landscape has subsequently benefited from the creation of cryptocurrency, inspiring financial technology companies to create their own digital marketplaces and wallets. However, these companies must be wary about the Digital Market Clarity Act of 2025, which brings new regulations to crypto that will transform the decentralized market into a centralized “safe haven.” 

Purpose: 

On July 17, 2025, the House of Representatives passed the Digital Market Clarity Act of 2025 to “provide the regulation of the offer and sale of digital commodities by the Securities and Exchange Commission and the Commodity Futures Trading Commission.” But, what does this really mean for the cryptocurrency investors? 

The Digital Market Clarity Act of 2025 expressly defines a digital commodity vs. security, clarifies when the Commissions may bring enforcement actions, vests jurisdictional authority in the Commissions to adjudicate disputes, and encourages innovation while maintaining investor protections. Through regulation by enforcement, the Act has allegedly created legal uncertainty, constrained investor participation, and promoted global innovation. Yet the core advantage of cryptocurrency lies in its decentralized market, free from traditional regulatory control. Thus, the issue is whether the Act pushes crypto markets toward centralization and how that shift will impact investors and the overall ecosystem. Rising above its drafted purpose, the Act defines how crypto has evolved from securities to digital commodities, straying from the SEC’s traditional tests.

Codification of a Digital Commodity vs. Security: 

Under Section 103 of the Act, a digital commodity is a digital asset “intrinsically linked to a blockchain system, and the value of which is derived from or is reasonably expected to be derived from the use of the blockchain system.” 

This codified distinction differs from the notorious Howey test, which are factors utilized by the SEC to determine when an investment of money is a security. As held by the U.S. Supreme Court in S.E.C. v. W.J. Howey Co., a security is: (1) An investment of money, (2) in a common enterprise, (3) with the expectation of profit, (4) to be derived from the efforts of others. The SEC has additionally enforced Simple Agreements for Future Tokens (SAFTs), investment contracts offered for the sale of digital assets to further support the classification of digital assets as securities.

Does the Act alter the reach of the Howey test? Yes. On the surface, the sale of digital assets is an investment of money in a common enterprise, where fiat money or other digital assets are exchanged with the expectation of profits or gains. However, digital assets are no longer considered as securities under the Act. The Act expressly excludes a digital commodity from any security, creating a new distinction between digital commodities and securities. While scholars and investors may not be able to apply the Howey test, the Act’s statutory definition of digital commodities will change how companies treat digital assets in the future. In fact, the SEC has moved to dismiss almost all pending Howey litigation as of November 3, 2025. Knowing which assets are securities, which are commodities, and why, unlocks the next phase of U.S. crypto policy.

New Registration Requirements of Digital Commodities: 

Sections 404 and 406 of the CLARITY Act contain essential investor protections, requiring trading facilities that offer or seek to offer a cash or spot market in at least one digital commodity to register with the Commission as a formal digital commodity exchange. By conferring a registration requirement to trading facilities, the Commission enforces safety and compliance standards to protect investors. Registered facilities are subject to the Commission's rules, which fosters the development of fair and orderly markets, protects customers, and promotes responsible innovation. In essence, the Act aims to strengthen investor confidence in the emerging digital asset marketplace. Prior to these requirements, the SEC has attempted to achieve investor confidence through other disclosure requirements, such as the Securities Exchange Act of 1933 and 1934. Thus, the Act’s efforts in codifying registration requirements for trading facilities will inherently promote safer investment practices and create a more predictable environment for investors. 

The CFTC’s Jurisdiction

The Act confers exclusive jurisdiction to the Commodity Futures Trading Commission over entities, such as digital commodity exchanges, digital commodity brokers, and digital commodity dealers, that engage in digital commodity trading. These entities must register their books and records with the CFTC, creating a transparent relationship between the two entities. Moreover, the Act confers limited jurisdiction to the CFTC over cash and spot transactions in permitted payment stablecoins. Additionally, this Act has conformed digital transactions to presumptions historically held by the CFTC. Specifically, the Act modifies an exception with regard to retail commodity transactions, clarifying that digital commodity transactions resulting in actual delivery within two business days or are executed with a digital commodity dealer are excluded from the definition of retail commodities. This dialog change highlights that the Act posits to enact a newfound regulatory scheme among digital transactions.  

When it comes to enforcing regulatory schemes through expressly defined jurisdiction- this isn’t the CFTC’s first rodeo. CFTC has previously exercised jurisdiction over the carbon market traded on a CFTC-regulated platform, impacting the climate change industry by setting guidelines for types of misconduct that market participants should look out for. The entity subsequently deployed a task force to combat environmental fraud and misconduct in relevant derivatives and spot markets. 

Critics of this jurisdictional change express concerns that regulation by both the SEC and CFTC may create confusion or inefficiency, or that the CTFC’s jurisdiction will reduce investor protections. Moreover, critics question whether the CTFC is prepared to assume their expanded oversight of digital commodity exchanges. Former CFTC chair Rostin Behnam calls for new legislative authority and funding increases to provide core customer protections since the CTFC’s mandate has grown. Historically, the CTFC has focused on regulating derivatives markets, not spot commodities.

A cursory analysis indicates that the CFTC’s jurisdiction over digital commodity exchanges will create a concise framework, supporting crypto investors by requiring exchanges to dual register with the SEC, satisfy certification requirements, meet capital and risk compliance, and more. However, the CFTC’s role in crypto regulation raises concerns about the Act's effects on the market’s centralization. 

Proposal: Will Crypto Become Centralized?  

Concerns and criticisms of the CLARITY Act stem from two real risks. First, the Act’s regulatory fragmentation or overreach could make it uneconomical for startups to operate in the U.S., encouraging relocation to friendlier jurisdictions. Second, newfound compliance costs and centralized gatekeeping (such as by creating registration and licensing requirements) could stunt the innovation that comes from crypto’s permissionless nature.

However, focusing on these risks negates the Act’s innovative purpose. The bill is specifically designed to unlock institutional capital by reducing legal uncertainty and building consumer protections. Further, proponents argue that these clear federal rules will increase mainstream participation rather than kill crypto outfits. As such, while regulation will likely shrink some risky corners of the market and raise barriers to entry, it will also make the market safer for many retail and institutional investors, spurring a wave of regulated product development. 

For example, the 2022 FTX collapse resulted from a mix of corporate governance failures and fraud (e.g., commingled and misused funds, ineffective audits, and weak and/or non-existent risk management and internal controls, to name a few). FTX, one of the “most trusted cryptocurrency exchanges,” embezzled and lost investor funds after holding investor assets via FTT, FTX’s digital tokens, instead of fiat money or cryptocurrency tied to a market-driven value. Failure to convert FTT tokens led to insolvency when other crypto platforms withdrew themselves from trading FTT. Investors quickly lost confidence, but could not withdraw their assets from FTX. Proponents argue that if CLARITY were enacted at the height of the FTX collapse, the Act would have reduced the operational inefficiencies that enabled FTX’s financial misconduct. Additionally, while statutory rules cannot eliminate fraud by bad actors, stronger regulations do improve the odds of earlier detection and remediation for the misuse of investor funds.

A thorough analysis of the CLARITY Act reveals a myriad of investor protections, making it desirable for a successful crypto market. To begin, the registration and supervision of exchanges and trading facilities give regulators tools to monitor value behavior and enforce capital, custody, and operational standards. It also creates clear jurisdictional lines between the SEC and CFTC to create more predictable compliance for market participants. Finally, the stable coin oversight provided through the GENIUS Act reduces the risk that stable coins will be used to hide solvency problems. It is unlikely that crypto will die under these laws. However, the fintech ecosystem will likely change. 

How the Act Conflicts with the Decentralized Market: 

While there are clear benefits of regulations in the crypto market, a decentralized crypto market may still be favored among investors. Decentralization supports censorship-resistant and permissionless innovation, where market participants can build or use blockchain applications without needing approval from a central authority. Moreover, users can hold their own assets through self-custody in a decentralized system, reducing their dependence on banks or exchanges. Decentralization also lowers costs (by cutting out intermediaries) and enables on-chain composability. Investors favor a decentralized market not only for high financial returns, but also out of general technological curiosity and ideological commitment to decentralization.

Decentralization conflicts with the CLARITY Act, which requires registration, licensing, and custody standards for digital assets to prevent fraud and reduce risk. While these rules are intended to protect consumers, they naturally push the market toward centralized, regulated platforms and away from the open, permissionless systems that academic and regulatory studies rave about. 

In the face of this, a middle ground is possible. Lawmakers can protect consumers without erasing decentralization by safeguarding self-custody, using proportionate rules for non-custodial protocols, such as lighter disclosure standards instead of full financial institution requirements, and coordinating globally so innovation is not pushed outside the U.S. 

Critics of the CLARITY Act: 

Stakeholders may construe the CLARITY Act as “regulation by enforcement,” where the Commission has created legal uncertainty, constrained the participation of traditional financial institutions, and pushed innovation abroad. However, key executives in the crypto industry have encouraged the legislature to pursue the Act. CLO of Coinbase Paul Grewal emphasizes that the Act calls for “more leadership from the SEC,” making the US a crypto model to other nations. Coinbase VP of U.S. Policy Kara Calvert echoes Grewal, stating that “Consumer protections are sacred at Coinbase- that’s what [CLARITY Act] is about.” 

“The CLARITY Act would enshrine a regulatory framework to protect crypto consumers into law, so that American customers, businesses and innovators alike can build and trade safely,” Kara added. “Now is the time, and crypto voters are watching.” 

Other Crypto Improvements: 

Congress passed the Guiding and Establishing National Innovation for U.S. Stablecoins of 2025, or the GENIUS ACT of 2025, earlier this year to regulate payment stablecoins. Specifically, the Act creates a federal licensing framework for permitted payment stablecoins, sets reserve and transparency requirements for users, and designates a primary federal regulator for non-bank issuers. Together, these measures make stablecoins safer as a means of payment and also work to reduce systemic risk if adoption grows. The GENIUS and CLARITY Acts work in tandem: while the former creates a registering and licensing system for companies that issue them, the latter creates rules for how crypto trading platforms must operate. Together, the Acts have the capacity to shift the U.S. from an unpredictable, case-by-case enforcement market to a clearer system with written rules for crypto. 

Supporters of CLARITY appreciate the safeguards the acts will allow. However, critics warn that heavy prudential rules could raise costs and push activity offshore. 

Conclusion

By codifying the definition of digital commodity, imposing new registration requirements for such digital commodities, and authorizing exclusive jurisdiction to the CFTC to maintain compliance over exchange forums, the Digital Market Clarity Act of 2025 intentionally moves towards centralization in the crypto market. While the Act has great effect on the crypto market, its implementation will ultimately determine whether decentralized innovation continues to grow or becomes constrained in the U.S. As of November 18, 2025, the CLARITY Act has been received by the Senate, who has referred it to the Committee on Banking, Housing, and Urban Affairs. Congress next must present the Act to the President, who will then sign it into law [or may veto], affecting fintech companies and savvy crypto investors.

*The views expressed in this article do not represent the views of Santa Clara University.