Washington’s New Crypto Bill Would Strip States of Oversight Powers

CLARITY Act crypto regulation is entering a critical stage as U.S. lawmakers prepare for a January Senate markup that could significantly reshape how digital asset markets are regulated. The Digital Asset Market Clarity Act of 2025 has already passed the House, but the next challenge is whether the Senate can resolve remaining regulatory gaps, political tensions, and investor protection concerns within the bill.

The decision will affect more than federal oversight alone, shaping how responsibility and risk are shared among crypto platforms, developers, and retail investors. The legislation is being presented as a long-overdue effort to replace years of regulatory guesswork with one clear market framework.

However, behind this promise of certainty, lawmakers are still facing tough questions around decentralized finance, the role of state regulators, and whether clearer rules could unintentionally reduce effective oversight.

Why has jurisdiction remained crypto’s biggest regulatory challenge?

At its core, CLARITY Act crypto regulation addresses crypto’s longest-standing issue in the United States, which is deciding who has the authority to regulate it. Many digital assets function like commodities, are sold in ways similar to securities offerings, and move through software systems that do not fit into traditional corporate structures.

This overlap has created a long-running power struggle between the Securities and Exchange Commission and the Commodity Futures Trading Commission. The bill seeks to end this conflict by clearly explaining when secondary trading should no longer be treated as part of an original securities sale.

It also sets out a clear registration process for platforms that handle crypto liquidity. Lawmakers involved in drafting the legislation say the goal is to clearly define how the market works, rather than automatically increasing enforcement authority.

How does the DeFi carve-out redefine who is an intermediary?

One of the most debated parts of CLARITY Act crypto regulation is the DeFi carve-out. It says a person should not be treated as a regulated intermediary simply for running code, validating transactions, maintaining protocols, offering wallets, or taking part in liquidity pools used for spot trading. The goal is to prevent regulators from treating basic infrastructure like an exchange.

However, the bill also recognizes that some boundaries remain unclear. Many DeFi front ends do more than just show information. They route trades, choose default settings, apply blocklists, and shape how liquidity moves. While the legislation provides a safe harbor for offering a user interface that lets users access blockchain data, it does not clearly explain where a simple interface ends and where operating a trading venue begins. 

Legal analysts expect this unclear area to become a key issue in future rulemaking and court cases, especially in situations where front-end design choices have a real impact on how trades are executed and priced.

Does the bill adequately protect retail users in DeFi markets?

This is where CLARITY Act crypto regulation draws its strongest criticism. Although the DeFi carve-out keeps federal anti-fraud and anti-manipulation powers in place, it does not set out clear rules for everyday investor protection in permissionless liquidity pools.

The gaps are hard to ignore. The bill does not require standard disclosures, does not mandate controls to manage conflicts of interest, does not address risks linked to maximal extractable value (MEV), and does not clearly explain how retail users can seek remedies when losses occur.

Critics say this leaves investors vulnerable in systems where governance can be tightly held and insiders may shape outcomes without the usual oversight. Supporters argue that placing heavy rules on DeFi infrastructure would weaken how it is designed to work. Opponents respond that removing intermediaries should not mean removing basic protections for users.

Why does federal preemption of state law matter so much?

Another key part of CLARITY Act crypto regulation is its preemption clause, which would classify certain digital commodities as covered securities. This approach limits the ability of states to apply their own registration or qualification requirements, effectively replacing a patchwork of state-level rules with a more unified federal framework.

For crypto companies, this could ease the burden of complying with dozens of different regulatory systems. For state regulators and consumer advocates, however, it raises concerns. State enforcement has often been one of the quickest ways to respond to scams and abusive practices. Reducing that role, even while keeping anti-fraud authority in place, shifts more regulatory power toward Washington.

The overall impact of this provision depends on how digital commodities are defined and interpreted. If courts accept a clear separation between an initial investment contract and secondary market trading, the preemption clause will have real effect. If not, it risks becoming another area of legal uncertainty and dispute.

What political tensions are shaping the Senate debate?

The Senate markup will be more than a technical step. It highlights a deeper clash of views around CLARITY Act crypto regulation. On one side are lawmakers who believe the United States must lead in crypto innovation by allowing DeFi and digital markets to grow without being forced into outdated regulatory models.

On the other are senators who are focused on consumer harm and worry that disintermediation can allow companies and developers to avoid responsibility. These opposing views help explain why definitions, safe harbors, and enforcement carve-outs are being reviewed so closely.

Several senators have already indicated that proposed changes could narrow DeFi exclusions or add stronger investor protection requirements, especially for products aimed at retail users.

Conclusion 

CLARITY Act crypto regulation is Congress trying to bring order to a market that has spent years operating in gray areas. The DeFi carve-out sends a clear message that infrastructure alone is not meant to be treated as a middleman. The preemption clause sends another message, that a national market cannot function under fifty different rulebooks.

Still, major questions remain unanswered, including how front-end manipulation will be handled, what protections exist for retail users inside liquidity pools, and whether lawmakers can bridge the divide between promoting innovation and enforcing accountability. The January Senate markup will show whether those questions are meaningfully addressed or simply left for later. What comes out of that process could be a stable framework for U.S. crypto markets, or a cleaner roadmap that still avoids some of the hardest regulatory terrain.

Glossary

DeFi Carve-Out: A rule that says some DeFi activities are not treated like exchanges.

CFTC: A US agency that regulates commodity and derivatives markets.

State Preemption: When federal law limits state-level crypto regulation.

CLARITY Act: A US bill meant to clarify how crypto markets are regulated.

Secondary Trading: Trading crypto tokens after they are first sold.

Frequently Asked Questions About CLARITY Act Crypto Regulation

Has the CLARITY Act passed into law?

No, the CLARITY Act has passed the House but is now moving to the US Senate for review.

Why is the Senate review important?

The Senate review will decide if the bill becomes law or is changed or delayed.

What problem does the CLARITY Act try to solve?

The bill tries to end confusion over which US agency regulates crypto markets.

How does the bill affect DeFi platforms?

The bill says basic DeFi activities like running code or wallets are not exchanges.

Why are some people worried about investor protection?

Some critics say fewer state rules could make it harder to protect small investors.

Sources

Cryptoslate

altFINS