The Crypto Market Bill Explained: Analyzing the CLARITY Act of 2025 and Its Regulatory Impact on Digital Assets

R Tamara de Silva

Executive Summary: On May 29, 2025, bipartisan leaders in Congress introduced the Digital Asset Market Clarity Act of 2025 (the “CLARITY Act”), also called the Crypto Market Bill, to provide comprehensive regulatory guidance for digital assets. Designed to clearly delineate the regulatory jurisdictions of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), the Act seeks to resolve longstanding uncertainty affecting the digital asset marketplace. The legislation defines key terms including digital commodities, mature blockchain systems, and permitted payment stablecoins, establishing clear categories to facilitate compliance and innovation. It introduces the concept of investment contract assets to clarify regulatory treatment of initial coin offerings (ICOs) and secondary trading. Additionally, the CLARITY Act imposes specific registration requirements and standards for digital asset exchanges and intermediaries, creates a clear regulatory framework for decentralized finance (DeFi), and outlines explicit rules for stablecoin oversight. The Act also has significant implications for traditional financial institutions and international market participants, aiming to position the United States as a leader in global digital asset regulation. This comprehensive framework provides clarity for hedge funds, exchanges, financial institutions, and compliance professionals, enhancing market stability, encouraging responsible innovation, and facilitating broader adoption of digital assets.

Introduction: Overview of the Digital Asset Market Clarity Act of 2025

The CLARITY Act proposes a comprehensive legal framework to govern digital asset markets, defining the respective roles of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) in overseeing digital assets. Aimed at providing long-sought certainty for market participants, the CLARITY Act introduces new statutory definitions and amendments to federal securities and commodities laws, addressing which regulator oversees different types of digital assets, how digital assets are defined and categorized, and what regulatory obligations apply to issuers and intermediaries.

This article offers a legal analysis of the draft Act’s key provisions that focuses on the allocation of regulatory authority between the SEC and CFTC, a new definitional framework (including terms like “digital commodity,” “mature blockchain system,” and “permitted payment stablecoin”), the treatment of so-called investment contract assets, the registration requirements for exchanges and other intermediaries, and notable innovations regarding decentralized finance (DeFi) and stablecoin oversight. All references are to the discussion draft of the CLARITY Act (H.R. ___) as released by House Financial Services and Agriculture Committee leaders in 2025.

Regulatory Jurisdiction: Defining SEC and CFTC Responsibilities

A central feature of the CLARITY Act is its division of regulatory responsibility between the SEC and CFTC based on the nature of the digital asset. Broadly, the Act distinguishes between digital asset securities, regulated by the SEC, and “digital commodities,” regulated by the CFTC. It further carves out a special category for “permitted payment stablecoins,” which are subject to a tailored dual-oversight regime. In effect, Congress is proposing to confirm the CFTC as the primary regulator of spot markets in digital commodities, while the SEC retains jurisdiction over digital assets that constitute securities (such as those offered as part of investment contracts).

The Act’s approach would settle a long-running ambiguity over which regulator oversees which tokens. Under the draft Act, the CFTC would exercise exclusive regulatory jurisdiction over cash or spot transactions in digital commodities and in permitted stablecoins when those transactions occur on a CFTC-registered trading platform. Conversely, the SEC’s role in those markets is limited to anti-fraud and market integrity enforcement.

The SEC “retains antifraud and market-manipulation authority” over digital commodity or stablecoin activities that take place on SEC-registered entities (such as broker-dealers or alternative trading systems). This division of labor is analogous to the existing split between the agencies for derivatives (where, for example, the CFTC regulates futures and the SEC polices security-based swaps for fraud only). Importantly, if a digital asset is deemed a “digital commodity” under the Act’s definitions (discussed below), it is expressly not a security and thus falls outside the SEC’s primary securities regulation. This point is codified by amending the statutory definition of “security” to exclude digital commodities and qualifying stablecoins.

Permitted payment stablecoins, that is essentially stablecoins meeting certain 1:1 fiat backing and regulatory criteria, are carved out as non-securities but with a shared oversight model: primary oversight of stablecoin trading would lie with the CFTC (when traded on a commodity platform), while the SEC preserves antifraud enforcement authority if such stablecoins are traded on SEC-regulated venues. (The issuance and prudential regulation of stablecoins are left to separate legislation outside this Act).

In practice, the CLARITY framework means a crypto asset will fall into one of three regulatory buckets:

1. a digital asset security (regulated by the SEC under the securities laws),
2. (ii) a digital commodity (regulated by the CFTC under a new commodities spot regime), or
3. (iii) a permitted payment stablecoin (generally treated like a digital commodity for trading purposes, with bank-like regulation of its issuer under other laws).

The Act also instructs the SEC and CFTC to coordinate on “mixed” products that may have characteristics of both securities and commodities. This recognizes that innovative digital asset arrangements might straddle regulatory buckets and will require joint regulatory attention.

Core Definitions Under the Act: “Digital Commodity,” “Mature Blockchain System,” and “Permitted Payment Stablecoin”

To implement the SEC/CFTC division, the CLARITY Act introduces new definitional frameworks in the Securities Act of 1933, the Securities Exchange Act of 1934, and the Commodity Exchange Act. These definitions are significant as they determine how an asset will be classified and regulated.

1. Digital Commodity: A digital commodity is a type of digital asset, often a cryptocurrency token, that is not classified as a security and can be transferred directly between individuals without relying on intermediaries. The Act defines digital commodities as assets tied to blockchain networks that are sufficiently decentralized or fully functional. Factors considered in determining decentralization include whether the network operates independently from a single company or issuer, is fully operational, and is publicly accessible. If these criteria are satisfied, the token is regulated as a commodity rather than a security. To help determine when this level of decentralization is reached, the Act introduces the concept of a “mature blockchain system,” a benchmark indicating that a blockchain network has achieved sufficient decentralization and operational maturity for its tokens to be classified as digital commodities.
2. Mature Blockchain System: The term “mature blockchain system” describes a blockchain network that has reached the Act’s required standards for decentralization and operational stability. While the specific criteria will be established through joint rulemaking by the SEC and CFTC, the Act itself outlines essential baseline conditions. These include independence from control by any single person or group, a broad distribution of validators or miners, public accessibility of source code and transaction history, and reliable operation for its intended use. The draft also allows issuers or sponsors to certify to the SEC that their network has achieved maturity by meeting specific decentralization benchmarks, such as token distribution and decentralized governance thresholds. Achieving this mature status is significant because it enables a token to transition from being regulated as a security to being treated as a commodity. The Act sets specific deadlines for projects to reach maturity, meaning issuers who use the Act’s exemptions must decentralize within a defined timeframe or risk losing their exemptions. In essence, this framework legally establishes “sufficient decentralization” as a requirement, encouraging blockchain projects to decentralize progressively to move beyond securities regulation.
3. Permitted Payment Stablecoin: The Act introduces the term “permitted payment stablecoin” to clarify the regulatory status of certain fiat-pegged digital currencies. Permitted payment stablecoins are digital assets pegged directly to fiat currency, redeemable on a 1:1 basis, and issued by federally or state-regulated entities, such as banks or licensed issuers. These stablecoins are specifically designed as mediums of exchange or stores of value, fully backed by reserve assets. Importantly, the CLARITY Act explicitly excludes these stablecoins from federal securities laws. Under the Act, oversight of stablecoin trading and custody primarily falls under CFTC jurisdiction on commodity exchanges, while the SEC retains authority only to enforce antifraud rules when stablecoins are involved on securities platforms. This division of regulatory oversight aligns with separate legislation governing stablecoin issuance and prudential regulation. As a result, the Act definitively resolves prior uncertainty about whether stablecoins could be treated as securities, thereby removing a significant compliance concern for stablecoin issuers, exchanges, and users.

In addition to these, the Act defines other relevant terms. A “digital asset” is generally defined to encompass any transferable digital representation (broadly covering cryptocurrencies and similar tokens).

The Act introduces the term “restricted digital asset,” referring to tokens that have trading limitations or are still in their initial distribution stage. The specific details of this term, and related definitions, will be clarified further through joint rulemaking by the SEC and CFTC within 30 days after the Act becomes law. These agencies must also develop procedures allowing trading platforms to change how they classify or list a digital asset. For instance, if a token initially categorized as a security later meets the criteria to be classified as a commodity (or the reverse), there will be a defined method for intermediaries to update its regulatory classification accordingly. This ensures that regulatory oversight remains accurate as digital assets evolve over time.

Treatment of Investment Contract Assets: ICOs and Secondary Market Clarifications

One of the most significant legal clarifications in the CLARITY Act is its treatment of “investment contract assets.” This term addresses a core ambiguity in current law: when a crypto token is initially sold as part of an investment contract (e.g., sold to investors with a promise of future network development), is the token itself a security, or is it merely an asset sold pursuant to a securities transaction? The case law has grappled with this issue in the absence of legislative guidance post the Howey Test.

The Act answers this by codifying that the digital asset itself is distinct from the securities “investment contract.” In other words, a digital commodity that was sold pursuant to an investment contract is not to be considered an “investment contract” (security) itself. This is achieved through amendments to the Securities Act’s definitions. The draft adds a definition of “investment contract asset” to the 1933 Act, essentially describing a digital asset which (A) can be possessed and transferred peer-to-peer and (B) was originally sold as part of an investment contract scheme. It then amends the 1933 Act (and parallel provisions in the 1934 Act and Investment Company/Advisers Acts) to explicitly exclude any such “investment contract asset” from the term “investment contract.”. The practical impact is to legislatively separate the token from the scheme thereby aligning with arguments raised in recent case law that the token itself need not be a security in secondary markets merely because it was once sold in a securities offering.

Building on this concept, the Act establishes new compliance pathways for offering digital assets under investment contracts. Section 202 creates an exemption allowing issuers to offer digital commodities without full SEC registration if specific disclosure conditions and blockchain maturity milestones are met. Issuers must provide detailed public disclosures similar to those required in crowdfunding or Regulation A+ offerings, ensuring investors remain informed. They must also commit to achieving a mature blockchain status within a set timeframe and submit periodic reports to the SEC until maturity is certified. Even after reaching maturity, issuers must disclose any significant ongoing activities affecting the network or asset.

Together, these provisions form a tailored safe harbor. They enable crypto projects to raise capital and distribute tokens lawfully without indefinite securities classification, provided they transition successfully to decentralization.

Section 203 complements this by clarifying that secondary market trades of digital commodities originally sold via investment contracts are not considered securities transactions. Once the initial sale concludes and the asset trades freely among investors, these trades become separate from the original securities offering. This clarification prevents ordinary secondary trading from being treated as unregistered securities transactions, enhancing liquidity and regulatory clarity.

Additionally, Section 204 imposes protections against insider abuses during this transitional period. It sets lock-up periods and trading volume limits for project insiders ("digital commodity related persons" and "affiliated persons") and requires disclosure of their transactions. These measures, similar to traditional insider trading restrictions, gradually ease as the blockchain achieves maturity, ensuring transparency and market integrity throughout the decentralization process.

Registration of Exchanges and Intermediaries: A Dual Regime

The CLARITY Act would impose a robust new regulatory regime on digital asset intermediaries, particularly those involved in facilitating trades of digital commodities.

Digital Commodity Exchanges: Any platform operating a marketplace for trading digital commodities (the equivalent of a crypto exchange for non-securities) would be required to register with the CFTC as a “Digital Commodity Exchange.” Section 404 of the Act lays out core principles and compliance obligations for these exchanges, mirroring many of the standards that apply to traditional commodity futures exchanges (designated contract markets). For example, a registered digital commodity exchange must implement rules ensuring market integrity, fair access, transparency, and operational resiliency. Exchanges must police for fraud and manipulation (through surveillance and listing standards), maintain adequate financial resources (capital requirements), segregate customer assets, and have system safeguards (cybersecurity and risk controls). They are also required to designate compliance leadership (e.g., a chief compliance officer) and to be members of a registered futures association (such as the NFA) if holding customer funds.

Notably, any customer assets held by the exchange must be kept with a “qualified digital asset custodian,” a bank or trust company or similar entity subject to appropriate regulation, to protect customers in the event of insolvency. The Act explicitly prohibits exchanges (and their affiliates) from acting as a counterparty to trades on their own platform, except in limited circumstances. This ban on exchange proprietary trading is aimed at preventing conflicts of interest (an issue raised by some crypto platforms that both facilitate trades and trade against their customers).

The Act also ensures that any “staking” or blockchain services offered by an exchange to its users (for example, if the exchange helps users stake tokens to earn rewards) are purely optional, meaning that an exchange cannot condition a customer’s access on using its staking services. In sum, digital commodity exchanges would be regulated in a manner comparable to national securities exchanges or futures markets, tailored to the spot nature of their business.

This assures a level of safeguards for the public and trading markets that is vastly different from being regulated as a money transmitter or not at all.

Digital Commodity Brokers and Dealers: Likewise, intermediaries who deal in digital commodities off-exchange must register. Section 406 creates registration requirements for “digital commodity brokers” and “digital commodity dealers,” broadly covering persons who solicit, facilitate, or engage in the business of buying and selling digital commodities for others or for their own account (outside a registered exchange). This could include over-the-counter brokers, market makers, or trading firms dealing directly with customers.

These brokers/dealers will be subject to comprehensive federal oversight by the CFTC, including regulations on minimum capital, risk management policies, recordkeeping of transactions, reporting to regulators, business conduct standards, and customer asset protections. If a broker or dealer extends financing to customers, for instance, offering margin loans for crypto trading, they must meet additional capital and disclosure requirements and supervise those lending activities closely. Customer funds held by digital commodity brokers/dealers must also be segregated and placed with qualified custodians, similar to exchange requirements. As with exchanges, brokers and dealers can facilitate staking or node operations for customers who opt in, but clients must affirmatively elect to participate in such services, and non-participation cannot be used to deny access to the platform’s primary services.

Significantly, Brokers and dealers must join a futures association (like NFA) as well, meaning they will be subject to self-regulatory organization (SRO) rules and examinations. Overall, these provisions import the customer protection paradigm of traditional broker-dealer regulation into the crypto commodity space, addressing concerns such as conflicts of interest, custody of assets, and adequate capitalization of intermediaries. This is a major and welcome development that will go a long to assuring the protection of customer funds.

Dual Registration

The Act addresses dual registration and regulatory coordination, recognizing that many firms handle both securities and commodities—such as crypto platforms listing diverse asset types. Under the CLARITY Act, firms already registered with the SEC as broker-dealers or securities exchanges must also register with the CFTC if they engage in digital commodity activities. While this could initially lead to overlapping compliance burdens, the Act clearly delineates each agency’s scope of authority. The CFTC oversees only a firm’s digital commodity activities, whereas the SEC regulates exclusively its securities business. This division mirrors current practices for firms handling both futures and securities, where each regulator focuses solely on its area.

Bringing Stakeholders Into the CFTC’s Jurisdictional Umbrella

The Act provides a form of provisional registration (Section 106) for existing crypto firms. Firms that intend to become registered digital commodity exchanges or brokers can file a notice of intent and operate provisionally while the CFTC develops final rules. During this interim period, they must still adhere to baseline safeguards, such as segregating customer assets, joining an SRO (futures association), and making certain public disclosures about their business. The provisional status automatically sunsets once the CFTC’s full regulations take effect, ensuring that in the long run all firms come under the formal regime. The Act also explicitly applies the Bank Secrecy Act (anti-money-laundering laws) to digital commodity brokers, dealers, and exchanges, treating them as “financial institutions” for AML compliance purposes. This will require crypto intermediaries to implement know-your-customer procedures and file suspicious activity reports, aligning with expectations that already apply to traditional broker-dealers and exchanges.

Other notable intermediary-related provisions include Section 405, establishing standards for qualified digital asset custodians (likely banks and state-regulated trusts), and Section 402, requiring futures commission merchants (FCMs) to hold customer crypto assets only through these qualified custodians. Additionally, Section 411 offers relief for primarily SEC-regulated firms, allowing the CFTC to exempt them from additional registration for limited commodity activities, provided they meet certain conditions. This measure aims to reduce duplicative regulations while ensuring effective oversight.

Finally, the Act encourages traditional financial institutions to enter digital asset markets by clarifying, in Section 311, that digital commodity activities qualify as “financial in nature” under the Bank Holding Company Act. It also overrides the SEC's controversial SAB 121 accounting guidance, removing significant regulatory barriers for banks offering crypto custody services. Together, these changes reduce obstacles for banks and custodians to participate in digital asset activities.DeFi and Decentralized Activities: New Exemptions and Boundaries

Exempt DeFi Activities

Up to now, there has been uncertainty as to when participation in a DeFi protocol or running blockchain nodes might inadvertently trigger registration as a broker or exchange. Section 309 of the Act (with a parallel provision in Section 409 for CFTC) provides that simply participating in the operation or development of a decentralized blockchain network does not necessitate registering with the SEC or CFTC, so long as one is not performing traditional intermediary functions. The statute lists specific examples of exempt DeFi activities, including:

• Developing or publishing software code (e.g., writing and releasing smart contract code or DeFi application code),
• Validating transactions through a consensus mechanism (for instance, mining or staking to secure a blockchain as an independent node),
• Providing computing infrastructure to a blockchain network, such as running a node or providing data storage/processing for the network’s operation, and
• Providing a non-custodial user interface to a protocol, like hosting a front-end website or app that allows users to interact with a DeFi protocol, so long as the provider does not custody customer assets, exercise discretion over transactions, or route orders.

This is a significant acknowledgement of the decentralized nature of certain crypto activities as it aims to protect developers, node operators, and purely technical service providers from being unintentionally swept into regulatory obligations simply for providing infrastructure or tools. By codifying this limited exemption, the Act may significantly foster innovation by assuring, for example, that a software developer writing DeFi code isn’t automatically treated as running an unlicensed exchange.

However, the Act also clarifies the flip side: when a person in a DeFi context does perform functions that resemble those of an intermediary, they will be subject to the usual registration requirements. For instance, if a party takes custody of customer assets, acts as a counterparty to trades, exercises discretionary control over a protocol or users’ orders, or otherwise intermediates transactions for a profit, that party must register with the appropriate agency (CFTC or SEC) depending on the asset and activity. In other words, decentralization is not a blanket escape from regulation either.

This is a balanced approach. A safe harbor for purely technical/network participation, while maintaining jurisdiction over centralized activities within DeFi. It reflects a legislative attempt to respect the distinctions between truly decentralized networks vs. intermediated services layered on those networks, providing substantially clearer guidance to industry.

For colleagues who are general counsel or on compliance teams, Section 309 offers a checklist of sorts: if your firm’s role is limited to software, validation, or non-custodial facilitation, you likely fall outside registration scope; if you start taking possession of assets or making matched trades, you step back into regulated territory.

Stablecoin Oversight and Exemptions

The CLARITY Act gives special attention to stablecoins, introducing the concept of “permitted payment stablecoins” and clearly defining their regulatory treatment. These stablecoins are digital assets fully backed by fiat currency, redeemable one-to-one, and issued by regulated entities like banks or licensed issuers. By clearly excluding them from securities laws, the Act ensures stablecoins fall under CFTC jurisdiction for trading activities, while prudential oversight of issuers remains covered by separate legislation.

Under the Act, permitted payment stablecoins, such as USDC, are treated as digital commodities, similar to Bitcoin or Ether. This removes the longstanding ambiguity regarding their potential classification as securities or mutual fund products. Consequently, exchanges and custodians can confidently handle compliant stablecoins without triggering complex SEC requirements.

The SEC retains antifraud authority over stablecoin-related activities on SEC-regulated platforms, preventing regulatory gaps. While the Act itself doesn't license stablecoin issuers, it establishes clear regulatory boundaries: stablecoins as commodities for trading purposes and prudential regulation for issuers under separate statutes. This approach recognizes stablecoins as payment tools rather than investments, aligning regulatory treatment with their practical use.

Conclusion

The draft CLARITY Act of 2025 represents a significant push by Congress to establish a coherent regulatory regime for digital assets, resolving uncertainty that has long plagued the crypto industry. By allocating regulatory authority between the SEC and CFTC based on clear asset definitions, the Act would provide exchanges, custodians, and market participants with much-needed clarity on which rules apply to their activities. It introduces innovative legal concepts from “investment contract assets” that separate tokens from investment schemes, to “mature blockchain system” criteria incentivizing decentralization, to safe harbors for DeFi developers. All of these concepts appear to be drawn with a view towards fostering responsible innovation while maintaining market integrity and consumer protection.

If enacted, the CLARITY Act would amend the Securities Act of 1933, the Exchange Act of 1934, and the Commodity Exchange Act in several technical but important ways such as redefining “security” to exclude certain digital assets, expanding the CFTC’s mandate to cover spot crypto trading, and creating new registration categories and exemptions tailored to crypto market realities. Hedge funds, trading firms, and digital asset exchanges would need to assess their asset portfolios under the new definitions (separating digital commodities from digital securities) and ensure compliance with the appropriate regulatory regime.

Exchanges and brokers dealing in Bitcoin or other non-security tokens would come under CFTC registration and rules, likely requiring enhanced compliance programs and SRO membership, while those handling tokens that remain securities will continue under SEC oversight with some firms needing to be dual-registered. Issuers of new tokens would have a much clearer (albeit somewhat rigorous) path to lawfully distribute tokens to U.S. investors and eventually achieve full network decentralization without the token being forever tied up in securities law constraints or litigation.

The CLARITY Act is still in draft form, and it may evolve through the legislative process. However, its introduction by the heads of the committees of jurisdiction signals a serious, bipartisan effort to “bring long-overdue clarity to the digital asset ecosystem.”

For legal and compliance professionals in the digital asset space, this proposal represents a pivotal and consequently development. It sketches the likely contours of U.S. digital asset regulation in the near future, and it does so with remarkable clarity and forethought. Should the Act (or a similar market structure bill) become law, the United States would finally have a statutory framework defining how cryptocurrencies, stablecoins, and other digital assets are classified and regulated, which in turn could unlock greater institutional participation and innovation anchored by clear rules of the road. Stakeholders would be well-advised to study the CLARITY Act’s provisions closely and consider adjustments to their business models and compliance strategies to thrive in this forthcoming regulatory landscape.

This firm will remain at the forefront of monitoring and interpreting these critical developments.

Footnotes: (All citations refer to the draft CLARITY Act of 2025 or related analysis.)

1. House Financial Services Committee & House Agriculture Committee, Digital Asset Market Structure Discussion Draft (May 2025) establishing SEC/CFTC authorities and responsibilities for digital assets.
2. House Financial Services Committee Press Release (May 29, 2025) – Statement of Chairman Hill emphasizing the bill’s goal to bring “long-overdue clarity” to the digital asset ecosystem and prioritize innovation and consumer protection.

NB This information is provided as a service to clients and friends for educational purposes. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from a legal professional