Forget stablecoin yield, how does the CLARITY Act treat DeFi?

The US Senate returned from a two-week recess on Monday, bringing the CLARITY Act back into the spotlight.

Stablecoin yield has dominated the debate, but the treatment of decentralized finance (DeFi) remains a big issue, particularly for non-custodial platforms and developers operating without control over user funds.

Over the years, many DeFi platforms have restricted or geoblocked US users due to regulatory uncertainty and enforcement risk. Or at least have done so in the past.

Magazine caught up with Maylea Ma, deputy general counsel at DeFi aggregator 1inch, to unpack how clearer definitions under the CLARITY Act could open the door for non-custodial DeFi protocols to expand into the US.

This conversation has been edited for clarity and length.

Magazine: How does the CLARITY Act treat non-custodial DeFi platforms compared to the European Union’s Markets in Crypto-Assets Regulation (MiCA)?

Ma: The coverage is already different because MiCA — the current iteration — doesn’t cover non-custodial, decentralized projects directly.

There’s a lot of talk and it will probably be covered in the next iteration. At the moment, we’ve got legal opinions from independent law firms to say that our products do not fall under MiCA regulation.

That already is kind of a big distinction because the CLARITY Act is creating a framework for decentralized, non-custodial projects, whereas MiCA hasn’t.

What’s interesting for us is the scope of the non-custodial developer, which is not required to register with the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC), or perform KYC, because it is not treated as a financial intermediary.

The question is what projects actually fall under that category? Examples include node operators, validators and those providing interfaces for users to access the technology.

These developers don’t fall under registration and enhanced due diligence requirements like KYC, whereas “financial intermediaries” are subject to a more stringent regulatory regime.

For us, it would be important to know what the coverage of the developer is, which basically gets protection from these enhanced regulations.

Editor’s note: An April 13 SEC staff statement says certain crypto frontends may avoid broker-dealer registration if they meet specific conditions. Staff guidance is non-binding and subject to change, while legislation like the CLARITY Act would establish a durable legal framework.

Magazine: How are DeFi protocols navigating the line between being non-custodial developers and financial intermediaries?

Well, a few weeks ago, the SEC and CFTC came up with a joint statement [about treating most cryptocurrencies as commodities – Ed]. Even though they are agencies and don’t have the power to set laws, they can provide interpretive guidance. Their guidance basically carved out that decentralized tokens like Bitcoin and Ether are not securities; they’re considered commodities, while things like real-world assets based on actual equities are securities.

That kind of guidance is hugely helpful for the industry to understand what kind of products can be supported and how to support them.

As an example with RWAs, we are looking to support institutional clients, and that comes with requirements like KYC and risk management. So we try to find a middle ground.

For example, we may not perform KYC ourselves, but we can import whitelists from issuers or broker-dealers who have already verified users. If they have a list of compliant wallets, we can allow or restrict access based on that.

Magazine: One of the most contested issues is whether DeFi developers could be treated as money transmitters. Where does CLARITY land on that, and what gaps remain?

Ma: The CLARITY Act contains the most explicit language we have seen from US lawmakers on this question. Section 109 of the House-passed bill and Section 604 of the Senate draft both establish that non-controlling developers and non-custodial service providers should not be classified as money transmitters solely for building or maintaining software. For protocols like 1inch, which facilitate trades without ever taking custody of user funds, that distinction is critical.

There is still some uncertainty whether the Senate’s draft of the bill, which added a new Title III with illicit finance provisions, would affect non-controlling developers and non-custodial service providers. The revised language has not been made public yet, so we are watching the next markup carefully.

Another note, while it’s true that Roman Storm was convicted on operating unlicensed money transmitting business, it is important to emphasize he was not convicted on money laundering which is a much more serious crime. 

To me, this non conviction is a hopeful signal. We believe code doesn’t equal aiding or abetting or having intent. Money laundering also bears more directly on the central DeFi debate of the usefulness of KYC in reducing or stopping money laundering versus other security toolings or solutions that are more privacy-friendly and can achieve similar results.

There is plenty of money laundering in TradFi, through institutions that do KYC, due to human errors, flaws in the system or gaps in process.

Magazine: What’s next for the CLARITY Act? What hurdles remain and what should readers expect in terms of the legal process?

Ma: It passed the House last year and is now with the Senate. The main blocker at the moment is stablecoin yield.

We are an interested participant because we support the trading of stablecoins, which represent a significant portion of trading volume.

I think it’s a big debate. There are different ways to frame yield, whether as interest or as activity-based rewards, but at the end of the day, they are incentives.

More broadly, when new technology emerges, incumbent industries often try to resist it because it threatens their interests and control over users and trading volume.

From our perspective, incentives are important for adoption. Crypto aims to reduce friction in transactions, but people need a reason to move into a new system.

If you remove incentives, adoption becomes harder.

In terms of the process, once the Senate passes a version, if there are changes, it needs to go back to the House for reconciliation before being signed into law.

It’s difficult to predict timing. Lawmaking in the US can be slow, and things can be delayed due to other priorities.

Ideally, something could be finalized by summer, but for now we are monitoring developments closely through industry associations.