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Clarity Act obstructed, Crypto community divided, conflict of interests between DeFi and TradFi

Hello everyone, today we are discussing a very important event from last week: the CLARITY Act, which the Senate Banking Committee originally intended to advance, was put on hold just before markup and entered a suspension period for negotiations.

It has taken up quite a few headlines and revealed industry divisions that many had not seen before: Coinbase and most other players in the industry have publicly split; conflicts between the crypto industry and the banking system, as well as traditional Wall Street interests, have surfaced. Meanwhile, an alternative route has emerged within Congress—the Senate Agriculture Committee (Senate Ag) is preparing to push forward its own market structure draft, and their announced timeline is moving very quickly.

What is the Clarity Act and its key development milestones

First, let’s talk about what the CLARITY Act itself is. In a nutshell: it is a comprehensive framework for the digital asset market structure. It seeks to answer: should a token be considered a security or a commodity? Should it be regulated by the SEC or the CFTC? How will obligations such as brokerage, custody, disclosure, and investor protection on trading platforms be implemented?

The industry has been looking forward to it for a long time because, for many years, U.S. regulation has largely relied on enforcement actions. For both ventures and public companies, whether a new product can be launched or how far it can go often depends on guesswork. Everyone hopes that a clear set of rules will bring this uncertainty to an end. On a key note, the House version passed last July with bipartisan support. In today's U.S. political environment, there aren't many bills that gain bipartisan consensus, so the market had expectations for the Senate to continue advancing it.

But last year, they didn’t capitalize on the momentum for two reasons: one was that the government shutdown impacted many project timelines; the other was that after progress in stablecoin-related legislation, the banking system increasingly realized a key issue: if stablecoins can offer returns, it would directly threaten deposits and funding sources.

Last Monday evening, the Banking Committee introduced a revised draft, giving the industry only two to three days to analyze it before preparing to enter the markup session on Thursday. Just hours before the markup was set to begin, Coinbase CEO Brian Armstrong publicly stated that Coinbase could not support this version, even saying, “Better no bill than a bad bill.” Ultimately, the markup was postponed, the bill is not dead, but has entered a negotiation suspension period.

Why did Coinbase backtrack at the last minute?

Coinbase’s 'backtracking' or 'threat to overturn the table' this time can be understood as its belief that the draft would lock in future commercial space in three critical areas.

The first is the de facto ban on stablecoin rewards/yield. Coinbase's concern is that this would kill the platform’s ability to provide users with stablecoin returns and rewards. It’s not just a minor feature, but a crucial tool for attracting new users, increasing balance retention, and enhancing user stickiness. Especially during market downturns, exchanges rely heavily on this type of 'balance-based, interest-based' revenue and product lever.

The second is the 'de facto ban' on tokenized equities. Coinbase describes this as a de facto prohibition: while there’s no explicit ban, the thresholds are set so high that it effectively blocks crypto-native platforms. The issue isn’t technical but about control—determining who can legally become the trading and distribution gateway for 'tokenized US stocks.'

The third is regulatory power imbalance and DeFi oversight. Coinbase believes the draft expands the SEC’s authority while weakening the CFTC, and forces some DeFi protocols into BSA/AML compliance pathways, imposing unbearable compliance costs on teams focused on coding and protocol development, stifling DeFi innovation and productization within the US.

Taken together, these three points explain Coinbase’s logic: it would rather delay than compromise on terms it finds unacceptable because it sees these provisions as determining the next decade’s business landscape, not just a short-term compromise for the current quarter.

Crypto’s diverging camps, and the legislative window before the midterm elections

Interestingly, the only major company to openly and strongly oppose is Coinbase. However, there is another influential group within the industry with a loud voice, including Kraken, Chris Dixon from a16z crypto, Ripple, and David Sacks, who holds significant political influence.

Their common ground is not that the draft is perfect, but rather an emphasis on a reality: there's currently a brief, rare legislative window. We've entered the election season, and the uncertainty of the upcoming midterm elections will narrow the window for major legislation. For them, an imperfect bill is better than the entire industry continuing to operate in a regulatory vacuum or under enforcement-style regulation.

Behind this also lies differences in business models. Coinbase wants the bill to strengthen its 'everything exchange' narrative: all assets on-chain, all transactions completed within a single account, while enabling USD balances on the platform to generate returns. In contrast, other players are more focused on 'legalization first, clear framework first,' so they can launch more products under the rules, advance broader institutional cooperation, and expand the market.

One of the core reasons: competing with banks for stablecoin yields (deposit war).

Next, let’s talk about the most important issue: the debate over stablecoin rewards/yield. Why do banks care so much? Because it directly competes with deposits. If users can convert their dollars into fully-reserved stablecoins and earn nearly risk-free returns of 4%-5% on platforms, bank deposits will drain away, funding costs will change, and lending capabilities will be affected.

Going further, banks will also emphasize systemic risks: if a stablecoin run occurs, could it transmit pressure to the banking system or even the broader financial system? Here, I can understand the sensitivity of banks to the term 'run.' When Silicon Valley Bank had issues, my own venture funds were with SVB, and many people experienced sleepless nights that weekend.

But Coinbase’s argument is also straightforward: stablecoin reserves are invested in short-term treasuries, which are close to risk-free rates. Passing on the yield to users is market competition and doesn’t inherently constitute systemic risk. On the contrary, banks keep demand deposit rates very low, profit from interest spreads, and simultaneously use legislation to disarm competitors' rate tools—this looks more like protectionism.

Therefore, what truly determines the rewards dispute is whether stablecoins in the U.S. will merely remain payment/transaction mediums or become savings vehicles. This redefines what a 'dollar account' means.

This is why we see Armstrong, in his CNBC interview, pointing fingers at banks, arguing that they shouldn't suppress savings competition through regulation. At the same time, he says he's willing and is currently communicating with bank CEOs, hoping for more comprehensive negotiations at Davos to reach some kind of industry consensus.

Core reason two: competing with Wall Street for leadership in RWA.

The second point of contention is RWA, especially tokenized equities—'bringing U.S. stocks on-chain.' The key here isn’t 'whether tokenization can happen,' but rather 'who can legally lead this path in the U.S.'

Coinbase's concern is that certain provisions in CLARITY may lock the secondary market trading pathways for tokenized securities within the traditional securities system—only granting licenses through existing stock exchanges, brokers, and clearing systems.

For instance, the New York Stock Exchange made a significant announcement on Monday about developing a platform for tokenized securities. This aligns with the direction previously indicated by Nasdaq. The move itself signals that traditional exchanges want to bring tokenization under the umbrella of securities compliance, as they are more likely to gain regulatory approval and integrate with clearing and custody systems.

Adding to what we've observed: Traditional asset management firms like BlackRock and Franklin Templeton are advancing in tokenized money market funds. Traditional Wall Street has an organized, systematic approach to tokenization with significant resource advantages.

So, could this be detrimental to consumer-focused, crypto-native companies like Coinbase or Robinhood in the future? One possibility is that Wall Street becomes the main player, while their opportunities shift more towards becoming distribution channels or custodial and settlement partners, instead of natively leading a new market structure. This would limit their potential for 'native product innovation.'

Core reason three: Excessive regulation of DeFi might stifle innovative products.

The third point of contention has been less discussed externally but is more fatal to the fundamental nature of crypto: the regulatory reach into DeFi.

Traditional financial compliance operates on the logic of clear responsible entities: Who performs KYC? Who reports suspicious transactions? Who assumes AML obligations? But DeFi often consists of code, decentralized governance structures, and sometimes lacks an operational entity in the traditional sense. Should you punish the code, the developers, the initiators, or those providing front-end access? This differs greatly from the logic governing traditional institutions.

Coinbase’s concern is that forcing certain DeFi protocols to comply with BSA/AML requirements would place developers in an extremely costly position, even one that contradicts the underlying operational logic, thus stifling the legalization and productization of US-based DeFi.

For Coinbase itself, this directly impacts its 'everything exchange' strategy—it is working on a broader product line, including more decentralized trading experiences. If DeFi faces excessive regulatory scrutiny, its new product lines will be significantly constrained.

Several possible future scenarios and their impact on COIN/HOOD/CRCL

Let's run through a scenario simulation.

First scenario: The bill advances and passes in a more conservative version.

This would put the most pressure on Coinbase: The product appeal of stablecoin rewards would be weakened, the room for imagination around tokenized equities would shrink, and DeFi regulatory scrutiny would weigh down its innovation roadmap.

For Robinhood, it’s more nuanced: A clearer framework could help it develop more compliant products; meanwhile, its cash interest largely comes from traditional partner banks, meaning it might face less competition from crypto apps using stablecoin interest rates to attract users. Therefore, it might even benefit competitively. For Circle, my intuition is that it leans towards 'bad news priced in'.

Circle’s distribution and market share are certainly important, but as a public company, if its revenue structure overly relies on interest-driven profits, it essentially becomes a spread-earning model. Investors will value it like a bank, capping its valuation potential. In the short term, reduced profit-sharing pressures may bring stability; in the long term, being forced to accelerate revenue diversification—expanding into more platform-based payment networks and B2B infrastructure income—might not necessarily be a bad thing.

Second scenario: All parties reach a compromise, forming a 'win-win version'.

For instance, stablecoin rewards are conditionally relaxed, tokenized equities are provided with a more feasible pathway, and the DeFi accountability chain is written more intelligently—this way, regulatory clarity advances without closing off key product spaces. This would be more positive for COIN, HOOD, and CRCL.

Third scenario: Talks collapse, and legislation fails.

This wouldn't be good for the industry because everyone would continue to operate under enforcement-style regulation, with all products carrying a discount due to compliance uncertainty. It could also favor traditional Wall Street: Asset management firms, exchanges, and investment banks would find it easier to lock tokenization roles within the traditional system, while crypto-native players’ profit margins in Real World Assets (RWA) would shrink.

Lastly, let’s briefly touch on an alternative route emerging within Congress: The market structure draft from the Senate Agriculture Committee (Senate Ag).

This line focuses more on the spot market regulation of digital commodities, essentially establishing a smaller but actionable regulatory anchor for the CFTC first, and then using it as a basis to discuss more complex overall structures. It is not a complete replacement for CLARITY, but rather like 'fitting half the puzzle first.'

But its timeline is indeed very fast: they mentioned releasing the legislative text on January 21st, with a committee markup on January 27th. This means there isn’t much time left for all parties involved in CLARITY to negotiate.

So my personal judgment is this: after this week’s consultations in Davos, the market will see indicators of the next step sooner. Whether CLARITY finds a compromise, or Senate Ag advances part of it first, or one side takes a harder stance, we need to keep tracking continuously. If the probabilities of scenarios change later, I’ll update everyone accordingly.

Alright, that’s all for today’s episode. Feel free to leave comments and continue the discussion. The full transcript will be available on our official account later. See you next time, bye!

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