DeFi Regulation Shifts to Agency Rulemaking Amid Failed CLARITY Act

The failed CLARITY Act cloture vote in the US Congress has been seen as a setback for the crypto industry, but it may have actually been a non-event. The bill was never intended to provide clear guidelines for decentralized finance (DeFi) regulation and instead handed over specific details to agency rulemaking.

According to Newton Foundation's Managing Director Mohammad Akhavannik, the relevant agency for AML-type screening is Treasury. Rulemaking didn't need CLARITY, and it won't wait for a bill like it.

The SEC has already shown how it plans to regulate the industry with narrow, conditional rules that have tight limits on who qualifies and how long the relief lasts. For example, Regulation Crypto Assets proposes new rules for token fundraising, capping exemptions at $5 million over four years or $75 million a year for larger raises.

Crypto shouldn't expect sweeping regulation to come quickly, as the SEC's slow and steady progress on specific interpretations of existing laws is more likely to be the default. The industry needs its own enforcement layer, but it isn't structurally prepared for regulation. Smart contracts ensure trustlessness only within very specific parameters.

The emergence and adoption of AI may slow down Congressional legislation timelines even further. Without a way to run authorization checks natively, centralized companies will run them instead, putting at risk the openness that decentralization promised.