US Crypto Regulation Shifts to Agencies After Clarity Act Fails, Promising Faster Innovation Amid Uncertainty

The United States’ path to comprehensive digital asset regulation has taken a decisive turn, with the failure of the Digital Asset Market Clarity Act to advance in the Senate. This legislative setback now places the onus squarely on the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to define the future of crypto markets, prompting a mix of anticipation for accelerated innovation and apprehension over regulatory durability.

Industry executives and legal experts broadly agree that regulatory progress will continue, albeit through an agency-led approach. Their expectations diverge, however, on whether these actions can establish a stable foundation for businesses or if they will leave the sector vulnerable to future political and legal shifts.

Lev Breydo, an assistant professor of law at William & Mary Law School, noted that the Clarity Act's struggle exposed deep divisions within the industry itself. "A coalition that looked unified against Gensler found out definitions create winners and losers," he stated, highlighting internal disagreements ranging from ethics provisions to the debate over yield products with community banks.

Despite the legislative impasse, federal agencies are rapidly moving to fill the regulatory void. On September 17, the SEC introduced a five-year "Innovation Exemption," allowing qualifying platforms to trade tokenized U.S. stocks via blockchain liquidity pools while the agency develops permanent rules. This initiative signals a proactive stance on integrating digital assets into traditional finance.

The CFTC followed suit on October 5, initiating a public feedback process for proposed rules on leveraged retail crypto trading and a new registration category for digital asset markets. This marks the beginning of a potentially lengthy rulemaking process rather than immediate implementation. Additionally, the SEC’s October 1 custody proposal aims to enable state trust companies to safeguard client crypto and permit advisers and funds to hold digital assets under specific conditions.

Why it matters

The shift to agency-led regulation carries significant implications for the digital asset ecosystem. For some market participants, this approach could unlock commercial opportunities more swiftly than a protracted legislative process. Paul McCaffery, head of digital assets at investment bank KBW, observed that the proactive regulatory efforts by the SEC and CFTC are already "unlocking a wave of M&A across digital assets, traditional financial services, and fintech alike."

Matt Hougan, Chief Investment Officer at Bitwise, echoed this sentiment, suggesting the agency approach is more favorable in the short term compared to legislation that would have necessitated years of subsequent rulemaking. He also anticipates a rise in token buybacks, particularly buy-and-burn models, following recent SEC clarifications that he believes enhance investor confidence.

Developers are closely watching how regulators will differentiate software creation from operating a financial intermediary. Cathy Yoon, chief legal officer at Solana-focused research and development firm Temporal, expressed hope that the SEC will recognize developers as software creators, preventing their work from being automatically classified as a securities enterprise. While acknowledging that staff FAQs are not formal rules, Yoon noted, "The fact that the SEC staff is even willing to say these things explicitly is a win."

Michael Lie, global head of digital assets at market maker Flow Traders, views comprehensive regulation as an inevitable development as finance progresses toward 24/7 trading. He is particularly focused on innovation exemptions and potential changes to transfer-agent rules, noting the advanced regulatory frameworks already emerging in European and Asian markets.

What to watch

Looking ahead to 2027, Professor Breydo anticipates the SEC will prioritize completing its offering and custody rules, building upon its tokenized-stock exemption. He views the agencies’ March joint interpretive release as a crucial foundation, superseding prior guidance and facilitating coordination within existing legal frameworks. However, a significant regulatory gap persists: ordinary, unleveraged spot trading of digital assets still lacks comprehensive federal oversight beyond the CFTC’s anti-fraud and anti-manipulation powers, a key objective of the failed Clarity Act.

Legal experts emphasize that implementation will be the most challenging phase. Derek Lowrey, head of legal at Newton Labs, highlighted that without legislation, overseeing venues, intermediaries, decentralized finance (DeFi), and spot markets remains more difficult. Nevertheless, existing anti-money laundering, sanctions, and record-keeping obligations offer a foundation for compliant teams to continue building.

Kevin Kreuser, general counsel at domain-name tokenization firm D3, stressed the need for clearer jurisdictional boundaries, especially for tokenized real-world assets. He affirmed that while agency action is welcome, "it does not provide the same long-term certainty as legislation."

Conversely, Jim Petrila, chief legal officer at Dromos Labs, which develops Aerodrome and Velodrome, holds a more optimistic outlook. He suggests that growing liquidity and the proliferation of tokenized securities on public blockchains could make any regulatory reversal impractical within two years. Yet, the benefits may not be evenly distributed. Hougan argues that the Clarity Act's failure inadvertently preserves a "regulatory moat" for incumbent players such as Coinbase and Kraken, potentially delaying competition that could otherwise lower costs. The emerging landscape promises faster experimentation, but with lingering questions about who can compete and the ultimate stability of these new rules. Ultimately, Breydo maintains that only Congress can deliver a comprehensive framework with statutory durability.