Future of Clarity unclear

Two of the witnesses called by Democrats to Friday's minority hearing of the House financial services committee are advocating for a new approach to updating financial-asset regulations with digital assets in mind.

Why it matters: Without some Democrats, market structure legislation cannot get through Congress.

Friction point: Market structure legislation will define the turf in the digital asset industry for the SEC and CFTC.

• Zooming in, one thing it does is create a legal pathway for projects that want to raise money by selling tokens.
• 🥊 And that puts it squarely in the crosshairs of a thorny fight in Washington: The profits made by the Trump family off the crypto industry make it politically difficult for Democrats to support legislation defining how to supervise cryptocurrency.

What they're saying: "The Clarity Act proposes ... when is a digital asset sufficiently 'decentralized' so that it should not be considered a security?" former CFTC chair Timothy Massad said in his testimony.

• "Thus, the Clarity Act takes us down a rabbit hole, one likely to generate more confusion than clarity."

Similarly, Carole House, a fellow at the Atlantic Council who served on the CFTC's technology advisory committee, agreed that some kind of regulatory update is overdue. But she expressed doubts about many of the specifics in this legislation.

The intrigue: The two critics effectively propose a more open approach: Direct the CFTC and the SEC to come together and work it out.

• "Congress could again direct the SEC and CFTC to jointly develop a framework and rulemakings to give greater specificity and adaptability to approaches to ensure appropriate coverage," House writes in her testimony.
• She suggests that Congress outline principles without getting into specifics and that it provide for temporary registration in the meantime.
• Massad makes similar arguments, preferring the model of a self-regulatory organization overseen by the two agencies.

The other side: At 236 pages, the CLARITY Act (HR 3633) does loads besides establish a legal pathway for issuers. And members of the majority Friday expressed frustration with the delays in writing new rules so far.

• Citing the billion-percent rise in bitcoin price since Congress began discussing regulation, Rep. Warren Davidson (R-Ohio) said, "What you've protected people from is making money."

💭 Brady's thought bubble: Critics might get their way, after a fashion, if no legislation passes.

• The seated SEC chair, Paul Atkins, has made it clear he intends to promulgate rules whether Congress acts or not.
• "I believe the commission has broad discretion under the Securities Acts to accommodate the crypto industry, and I intend to get that done," Atkins has said.
• Brian Quintenz, the nominee to be chair of the other agency, the CFTC, is expected to collaborate with him.

The upshot: If no market structure legislation passes this year, it's likely that the agencies will write their own rules, just without guidance from Congress.

What we're watching: The House financial services committee is holding a markup hearing today on CLARITY.

• It included an amendment that revised the whole bill, with an amendment in the nature of a substitute.
• The House ag committee passed the CLARITY Act this morning, with only a few votes against.