U.S. Crypto Regulation in Limbo After CLARITY Act Failure

The U.S. Senate's failure to advance the CLARITY Act has left the retail cryptocurrency market without a comprehensive federal regulatory framework. This setback has intensified pressure on the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to establish rules using their existing authorities.

The CFTC proposed a framework for exchanges offering margined, leveraged, or financed crypto transactions to retail customers. This would create a new category of federally regulated venues called ‘crypto asset markets,’ with requirements including anti-manipulation controls and proof-of-reserves obligations. However, the proposal does not grant the CFTC broad statutory authority over the spot crypto market, a key element of the failed CLARITY Act.

The SEC has also taken steps within its existing authority, proposing rules for crypto-asset custody by investment advisers and funds. These measures, however, do not provide the comprehensive market-structure legislation that was sought. The division of authority between the SEC and CFTC leaves unresolved the question of which regulator has clear authority over the broader spot market and what protections apply to retail investors.

Critics like Better Markets, a financial reform advocacy group, argue that the CFTC lacks the investor-protection mandate of the SEC and question whether its existing authority covers crypto transactions. Without congressional action, the resulting regulatory framework remains dependent on the agencies’ existing powers and could face legal challenges or change with future administrations.