The CLARITY Act is turning into a war about who gets to regulate yield. New laws are causing problems between DeFi businesses and incumbents, and they could even push on-chain US dollar yield offshore.
The Digital Asset Market Clarity Act (CLARITY) is now a proxy fight over who gets the intermediate US dollar yield on-chain—open decentralised finance (DeFi) protocols and payment rails, or a small group of big banks and custodians? This is because it missed its January 15 markup date and was pushed to the end of the month.
Critics, notably stablecoin issuers and institutional DeFi platforms, say that the latest draft makes it harder to offer rewards on stablecoins. They say that the measure could send onchain credit overseas instead of making it safer in the US.
Industry backlash highlights growing concern
Coinbase’s choice to stop supporting the bill this week made it clear that the industry is worried that the compromise has gone too far in favour of incumbents, as the wording sets up a punitive paradigm for DeFi and rewards.
Brian Armstrong, the CEO of Coinbase, remarked that it was better to have “no bill than a bad bill.” Jake Chervinsky, the chief legal officer of Variant Fund, said that CLARITY was the kind of law that would “live for 100 years,” and “We can take all the time we need to get it right.”
Regulatory design could reshape onchain credit markets
Jakob Kronbichler, CEO and co-founder of Clearpool, a onchain credit marketplace, talked to Cointelegraph about the “core risk” of the CLARITY Act: regulators selecting where yield can exist instead of how risk is managed in onchain markets.
He remarked, “Legislation won’t make demand for dollar yield go away.” He also noted that if compliance onchain liquidity arrangements are limited, activity is “likely to move offshore or concentrate in a small number of incumbent intermediaries.”
Ron Tarter, the CEO of stablecoin issuer MNEE and a former lawyer, agreed with Kronbichler’s worries. He told Cointelegraph, “If stablecoin rewards are pushed offshore instead of being made clear and compliant onshore, the US risks losing both innovation and visibility into these markets.”
Kronbichler said, “That choice will determine where institutional onchain credit goes over the next ten years.”
Passive interest versus activity-based rewards
Tarter says that CLARITY makes a clear distinction between passive, deposit-like interest and activity-based rewards. He says that the essential phrase is “solely in connection with holding.”
He thinks the measure is seeking a middle ground between banking groups who are anxious that stablecoin payouts will take away savings and platforms that see rewards as a main source of income and motivation.
Kronbichler sees one good thing for now: CLARITY’s current approach “makes a sensible distinction by not treating developers of non-custodial software as financial intermediaries,” which he says is important for innovation and institutional comfort.
He says that the true problem is to retain compliance duties linked to the people who actually control access, custody, or risk parameters, rather than moving towards general software maintainers who don’t. If those distinctions are too blurry, institutional desks will have a hard time figuring out who is responsible and may just stay away from onchain credit products that are US-facing.
Tarter agrees that the developer control test will probably be one of the most hotly debated issues at markup. He expects a lot of arguing over what counts as truly decentralised software and “situations where a small group can materially control outcomes.”
Developer responsibility and decentralisation thresholds
Jesse Shrader, CEO of Amboss, a company that analyses data for the Bitcoin Lightning Network, says that payments “simply for holding” that disguise dilution or rehypothecation are a real consumer protection issue. He points to earlier failures like Celsius and BlockFi.
He makes a clear distinction between yields that are unclear and set by the platform and yields that come from activity, which he says are more clear from a network architecture point of view.
To keep that difference, Shrader’s first request is simple: require regulated tokens to clearly show the sources of their yield so consumers can properly judge their risk.
Tarter thinks the gain comes from US legislation that protects consumers “without banning compliant innovation” (and without locking in a rewards system that only the biggest custodians can pay to traverse).