Crypto Companies Worry Over TradFi Head Start
Ambiguous registration guidelines spark debate among crypto advocates over Clarity.
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Seeking Clarity in the Clarity Act
Last week, concern percolated up among crypto companies that the Digital Asset Market Clarity Act—meant to answer crypto’s long-standing plea for regulatory clarity—might actually benefit traditional finance (TradFi) firms more than the startups that had lobbied for it. In short, the Clarity Act sets up a fast lane for existing SEC broker-dealers and a slower, to-be-written lane for everyone else. Startups fear that could freeze them out while regulators write rules.
Several companies raised alarms with industry trade groups, according to three sources familiar with the discussions, and, according to one source who was present, some even contacted staffers on the House Financial Services Committee (HFSC).
Per Eleanor Terrett at Crypto in America, Wall Street firms like Charles Schwab will be able to immediately start trading crypto after the Clarity Act is passed. Lewis Cohen, Cahill partner and co-chair of CahillNXT, the firm’s digital assets and technology practice, explained to me that this would be using an exemption for alternative trading systems (ATSs) — registered broker-dealers that operate as exempt securities exchanges — which allows them to trade up to $50 billion or 25% of overall trading volume during a calendar quarter.
The Clarity Act includes a separate registration framework with the CFTC for the crypto trading firms and exchanges who will be transacting at high volumes, but that process will take some time for the commodities regulator to figure out, requiring rulemaking. And some industry leaders fear the exemption for ATSs could give those firms, which are mainly in the traditional finance sector, a head start over new entrants figuring out the Clarity Act’s complex new CFTC registration framework.
Some disagree with this assessment, however. Cohen, for example, also told me that “to the extent that the alternative trading system is not currently allowing trading in crypto assets (and very few do), then the operators would need to get permission from FINRA, the self-regulatory organization to change their business, which would be more time-consuming than filing for the provisional registration with the CFTC.”
But while the lawyers and lobbyists who spoke with Brogan Law quibble as to whether the bill explicitly favors legacy finance or not, they acknowledged the concerns were understandable.
It turns out this is part of a broader worry that the Clarity Act itself isn’t exactly a model of clarity.
What the Bill Text Actually Says
Registration guidelines under Clarity, in particular, read more like footnotes than main text. They reference the various laws they are amending by design, but this approach strips context as to what those other pieces of legislation currently say, making them difficult to parse.
At a high level, the Clarity Act lays out two sets of rules: one for SEC-registered firms offering digital asset services, and one for firms registered with—or seeking to register with—the CFTC. SEC-registered firms face tighter limits on trading volumes and access to retail clients. CFTC-registered firms, which would oversee spot market trading (the primary venue for retail crypto activity), are subject to fewer such limitations.
This is because the Clarity Act gives the CFTC authority over spot market trading and the centralized exchanges where most of that spot trading activity takes place. And spot market trading is the primary concern for Congress and the industry’s best-known companies, since it’s how the vast majority of everyday people — those most vulnerable to fraud, exploits, and scams — interact with crypto.
But these regimes do not begin from parity. The bill leaves key details up to the agencies, directing the CFTC and SEC to jointly draft rules and meet various deadlines of up to a year. This kind of deadline is helpful to goalpost such mandated rulemaking, but there's no real enforcement mechanism for those deadlines. According to Jennifer Schulp, Director of Financial Regulation Studies at the Cato Institute, it is very likely that rulemaking will take longer than suggested in the bill. Even today, agencies are still hashing out some of the mandated rulemaking from the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, an ill portent for the Clarity regimes in the near future.
It’s also worth noting that Brian Quintenz, who will likely be confirmed as Chair of the CFTC in the coming days, may be the only commissioner at that agency for a meaningful portion of his tenure. With no other CFTC commissioners currently under consideration, that could mean that a Democratic President can control future rulemaking, further complicating the process.
Companies relying on these rules are subject to a provisional registration framework while the agencies engage in rulemaking. And while some, like Schulp, think this stopgap is effective policy, many practitioners are concerned that the ‘provisional’ nature of this framework could make some firms hesitant to invest in trading businesses while they wait for the permanent rules to come down the pike.
Compare this to the ATS notice regime that will allow TradFi entrants to play by the settled rules of the SEC, and you can see how some might think the Clarity Act favors TradFi over crypto.
For what it’s worth, GOP aides working on the bill think those folks are misled. “The assertion [that the Clarity Act favors TradFi] is unfounded,” one told me. “The CLARITY Act offers limited relief from registration requirements for firms solely registered with the SEC that engage in limited amounts of digital commodity activity. The legislation does not create a shortcut for traditional financial firms to participate in the digital commodity markets. These firms are subject to SEC rules, including those related to these activities required by the bill, and once their activity reaches a certain threshold, they must register with the SEC.”
One distinction that is worth watching, though, is comfort in this regulated space. Agency discretion could inadvertently favor TradFi companies because those firms have better relationships with regulators — even if the legislation itself doesn’t actually create a shortcut. “It is always easier to seek a license as a regulated entity than obtaining one as a non-regulated entity as there are already processes and staff in place for compliance, risk, audit etc.,” Eli Cohen, Chief Legal Officer at Centrifuge, explained. But “this is more an inherent feature of a new regulatory regime rather than any kind of policy choice made by the drafters.”
The Politics of Silence
One of the main problems on reporting this issue is that discussing problems in Clarity has become taboo. GOP aides were eager to clear things up, but not on the record. “We just want to make sure you’re able to report on this, because there’s all this chatter and confusion going around,” they told me.
Aides are likely concerned about all that “chatter and confusion” because Republican members of Congress are under tremendous pressure to get the CLARITY Act passed as soon as possible. President Trump has given Congress an August 1 deadline to put the bill on his desk because he wants this done before the members go on summer vacation. And nobody wants to draw the President’s ire, lest he, or the crypto donors who bankrolled many of these members of Congress’ campaigns, call them out for holding things up.
The HFSC, where the Clarity Act has seen the most friction, is “trying to tamp down all dissent right now,” one lobbyist tracking the bill explained. Another source I spoke to said they had been raising their critiques with the Clarity Act with Republican leadership on the committee privately, so as not to encourage blowback to passing the legislation in general.
Raising technical issues with the bill runs the risk of adding to the already heavy pushback the Clarity Act is facing from many Democrats. Indeed, while Democrats’ loudest criticisms of the Clarity Act focus on President Trump’s crypto businesses, several have also argued that the bill would raise more questions about how crypto is regulated than it answers should it become law. Nobody in the crypto industry wants to give these Democrats ammunition to say the Clarity Act shouldn’t become law because it’s unclear.
And so, a kind of quiet confusion reigns. One company flags a concern, it echoes through policy circles like a nerdy game of telephone, and eventually fades—only for the cycle to repeat with another section of the bill. That may continue even after the vote, because digesting legislation this complex takes more time than Congress has. The only sure fix is to push the bill past August — something which several lobbyists, all of whom once wanted to see market structure ASAP now say they prefer.
“There’s not enough time between now and an arbitrary August deadline for market structure,” explains Schulp. “With anything this complicated, it’s par for the course that people need time to sit down and digest it. The speed at which they’ve moved has made it difficult to do that digesting and to really understand if there are places that need clarification.”
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