The short-term obstruction of legislative action by Congress does not mean that U.S. cryptocurrency regulation is stalled.

By: Rhythm

The legislative structure of the U.S. cryptocurrency market is once again stuck in Congress.

On September 15, the U.S. Senate failed to pass the procedural motion needed to advance the Digital Asset Market Clarity Act (CLARITY Act). The final vote was 49 in favor and 50 against, failing to meet the 60 votes required to end debate.

This does not mean that the CLARITY Act has been definitively rejected, but as the midterm elections in November approach, it has become significantly harder for the bill to continue progressing in the short term.

For the cryptocurrency industry, a more practical question has arisen: If Congress cannot legislate in a timely manner, who will regulate next?

The answer may lie with the SEC and CFTC.

In the past few months, the two U.S. financial regulatory agencies have been preparing for this scenario. SEC Chair Paul Atkins had previously stated that before Congress completes market structure legislation, he and CFTC Chair Michael Selig plan to provide the market with a "bridge" to formal legislation through their jointly promoted Project Crypto. In March of this year, the SEC and CFTC jointly issued interpretive guidance on how securities law applies to crypto assets, aiming to clarify some regulatory boundaries ahead of time.

With CLARITY unable to advance for now, this originally transitional regulatory path may become more important.

If Congress does not provide answers, the SEC and CFTC will start to set the rules first

One of the core issues the CLARITY Act attempts to address is the longstanding debate over regulatory jurisdiction in the U.S. cryptocurrency industry.

Which digital assets qualify as securities? Which qualify as digital commodities? Should trading platforms register with the SEC or the CFTC? Where are the regulatory boundaries between the two agencies? Ideally, these questions need to be clarified by Congress through codified law. However, regulatory agencies are not prepared to continue waiting.

Just a day before the Senate vote, SEC Chair Paul Atkins publicly supported CLARITY while stating that even without congressional legislation, the SEC will continue to advance its cryptocurrency regulatory agenda. According to Atkins, the issuance of crypto assets, custody, and related market infrastructure reforms will continue to be a focus of SEC rulemaking.

In fact, the SEC has already started to take action this year.

In March, the SEC issued interpretive guidance on crypto assets, further explaining how federal securities law applies to different types of tokens and proposing classifications for digital commodities, digital collectibles, digital tools, stablecoins, and digital securities. The CFTC simultaneously joined this interpretation, stating that it would maintain consistency with the related framework when enforcing the Commodity Exchange Act.

In August, Atkins further stated that the SEC is pushing for "tailored" rules and exemption systems for the crypto asset market, including adaptations for capital formation and on-chain transactions within the existing regulatory framework. However, he emphasized that congressional legislation is still "indispensable," one reason being that formal legislation can create more enduring rules that are less likely to be overturned with changes in future regulatory leadership.

On the other side, the CFTC is also preparing to expand its role.

According to the original text, CFTC Chair Michael Selig has instructed staff to study how to utilize existing authority to regulate the crypto asset market if Congress is unable to pass the market structure bill. Possible directions include establishing a CFTC regulatory pathway for some crypto markets offering leverage or margin trading, and researching how DeFi protocols can operate under the U.S. regulatory framework.

This means that some market rules originally intended to be established by the CLARITY Act may first be developed by the SEC and CFTC through regulatory interpretation, rulemaking, and exemption mechanisms.

Shifting from "Congressional legislation" to "regulatory agencies taking the lead"

This change could put U.S. cryptocurrency regulation into a different phase.

Previously, the market's focus was on when CLARITY would pass and how Congress would ultimately delineate the powers of the SEC and CFTC. Now the question might become: How far can the two agencies go using existing laws before CLARITY arrives?

The SEC primarily holds regulatory authority over the securities market, so it can adjust existing rules around digital securities, token issuance, cryptocurrency custody, and the tokenization of securities.

The CFTC has long been responsible for the commodities derivatives market and holds some regulatory authority over markets related to digital commodities such as Bitcoin. In the absence of new congressional authorization, it can also utilize existing laws like the Commodity Exchange Act to establish new regulatory pathways in areas it can cover.

The two agencies can also act in concert.

When the SEC issued its crypto asset interpretive guidance in March, the CFTC participated simultaneously; Atkins previously stated in congressional testimony that the two agencies would jointly study token classification and related exemption mechanisms through Project Crypto, aiming to help investors and the industry understand their respective regulatory obligations more clearly.

Therefore, CLARITY being obstructed does not mean that the U.S. cryptocurrency industry returns to a completely rule-less state. On the contrary, regulatory rules may continue to increase, but the main producers of those rules have temporarily shifted from Congress to the regulatory agencies.

However, the SEC and CFTC cannot fully replace CLARITY

However, there is still a key distinction between "the regulatory agencies taking over" and "Congressional legislation."

The SEC and CFTC can address: How should crypto assets be regulated under existing laws?

Whereas CLARITY attempts to answer: What kind of legal framework should the U.S. establish for the future of the crypto market?

These two matters are not entirely the same.

The SEC can interpret securities law, modify registration rules, and grant certain exemptions; the CFTC can also establish a market regulatory system within its statutory authority. But neither agency can rely solely on administrative rules to completely redefine the powers that Congress has granted them.

This is also why Atkins emphasizes the "indispensability" of market structure legislation even as he actively promotes SEC rule reform for crypto. He previously stated that regulatory agencies can build a "bridge" first, but to create more enduring rules, congressional action is ultimately still required.

This also provides another perspective for understanding why CLARITY faced this obstruction.

In the short term, the market may not need to wait for Congress to see more regulatory rules: the SEC and CFTC have already started to take action, and as the legislative window for CLARITY narrows, the importance of these two agencies may further increase.

However, in the long term, how digital assets will be classified, what each of the SEC and CFTC will oversee, and what kind of institutional framework the U.S. cryptocurrency trading market will ultimately adopt, still cannot completely bypass Congress.

Therefore, the fact that CLARITY is not advancing does not mean that U.S. cryptocurrency regulation has paused. What is more likely to happen is that the SEC and CFTC will take over this baton first, and continue to push the rules forward within the scope allowed by existing laws.

What truly deserves attention next is not just when CLARITY will re-enter the Senate, but what rules the SEC and CFTC will introduce first and how far they can go without new legislation.