The Clarity Act, Explained (ft. Miles Jennings)

Transcript

The Clarity Act was introduced in 2025. It's over a year later now, it still hasn't passed yet. What's delaying it? >> If you look at how the industry has been regulated, it basically swings every time a new administration comes into place. And you can't really build a real industry on top of, you know, shifting sands like that. If you look at our history of securities laws, corporate laws, all of that, all of them are designed to help build companies, but the thing that they assume is that companies maintain control of the things that they build. How do you have a system like Bitcoin operate in the [music] bounds of securities laws?

There's no real way to do it, and so by necessity you would have to [music] have someone control that network, thereby defeating the purpose of the blockchain itself. Clarity is more focused on network tokens, and the way that it defines network tokens, if you think about how a share of stock gives you ownership [music] of a company, a network token gives you ownership of a blockchain network. There is no person that sits in between. [music] >> What about liability if something goes wrong? >> [music] >> All right, we are live with Miles Jennings, who is head of policy and general counsel at a16z crypto to talk about some interesting crypto news right now about the Clarity Act. So, Miles,

welcome to MDS. >> Thanks for having me. Good to be here. >> So, for our audience, which is often, you know, more more AI native than crypto, tell us about what the Clarity Act is, what are the provisions, why is it important? >> Sure. So, uh, you know, I think most people that have have heard of crypto have probably heard that there's been a lot of regulatory animosity uh, and a lot of battling between various regulatory agencies. Um, and you know, this this bill is is called the market structure bill, the Clarity Act. And what it does is it creates a tailored regulatory framework for digital assets, right, for cryptocurrencies um, like Bitcoin, like Ethereum. Um, and it draws, you know, regulatory jurisdictional lines between

the SEC, CFTC, you know, and other regulatory agencies at the federal level. Um that's really important because, you know, for the entire time that the industry has existed, it's been very unclear whether or not it's been subject to, you know, digital assets have been subject to securities laws, how those securities laws apply, how entrepreneurs can comply. And then it also does things like establish, uh you know, guardrails for intermediaries in the space, things, you know, big exchanges like Coinbase, um that provides guardrails around how they interact with their customers and safe guard their assets. And then it also provides a lot of protections for entrepreneurs to ensure that they, you know, aren't uh unfairly targeted by, uh you know, regulators for, you know, creating uh tools that that people might use uh in various different ways, right?

And so this is uh an incredibly important piece of of legislation um that really, you know, is targeting kind of the the the key areas of uncertainty that plagued the space for a long time and have really impeded innovation. >> Mhm. So, the Clarity Act was introduced uh in 2025. It's over a year later now. It still hasn't passed yet. Uh what's delaying it? >> Yeah, what's the what's the hold up? >> Yeah. Well, I will say. So, it's been it's been, you know, this has been in progress for, I would say, almost 7 years now. The industry has long been pushing for for regulatory clarity because if you look at at how the industry has been regulated, it basically swings every time a new administration comes into place, right?

And and you can't really build a a real industry on top of, you know, shifting sands like that, right? If one day you say activity is illegal, the next day you say it's legal, um you know, how are entrepreneurs supposed to navigate that? So, I would say, you know, it's it's been even more frustratingly longer, right, that we've been at this. Um and, you know, hopefully now we're we're really coming close to the finish line. Um with respect to, you know, why it takes so long, what I would say is that, you know, for a long time the industry has been very divided about how this stuff should be regulated. What is the correct regulatory approach? Um you know, there are people that think that hey, let's stick with the securities laws, um um, and you know, those have worked for, you know, building companies. There are others that say,

you know, no, we need something that is totally different because at the end of the day, what blockchain technology really enables you to do is build networks as opposed to companies, right? And and, you know, if you look at our our history of securities laws, corporate laws, all of that, all of them are designed to, you know, help build companies, and it and it does that very well. But, the thing that they assume, right, is that companies maintain control of the things that they build, right? The services that they offer. And blockchain's kind of coming at a very different angle in that they create permissionless open networks that no one controls. And so, our existing regulatory framework is not really designed for that. Um, so, you know, a lot of people have pushed for for a completely different regime. And so, where we've ended up in

is somewhere in the middle, right? We're splitting the baby between, you know, different regulatory agencies and creating a framework that really does, um, you know, that's built upon a principle of control, looking at how these systems can, you know, operate without any single actor, um, you know, controlling the system. So, so industry is now coalesced around, you know, kind of that vision and is is is very supportive of the bill. They've been working on that approach for, you know, several years now trying to push that through Congress. Um, but it just takes a a lot of time to to A make this issue important for members of Congress. And, you know, one of our our colleagues, um, on the government affairs team like to say that, you know, Congress only really acts when when there's an emergency, right? And and I think one of the things

that kicked off this round of of like focus on legislation was really the FTX crisis back in in 2022. Um, and you know, that was an exchange that basically went under and and, you know, tons of people lost money. Um, that was the impetus to really start taking the legislation seriously and and, you know, it's now taken basically 3 4 years from there uh to get to the point where we are are very close to getting a bill through through the Senate and through Congress. >> So, tell us about the way that these different assets are classified. So, we have digital commodities, investment contract uh assets, and permitted payment stablecoins. What are these different categories?

>> Sure. So, at a very high level, what I would say is clarity. So, so we we previously, you know, Congress passed the GENESIS Act last year, last summer. It's about basically 1-year-old. It's just its birthday the other day. That bill was all about stablecoins, so permitted payment stablecoins, right? Those are USDC, Tether, right? Assets that are basically one-to-one backed by US Treasuries, right? And so, that was kind of the regulatory framework for that. That's, you know, led to a a boom in growth in terms of of stablecoin payments, you know, being used. There's There's all sorts of companies that are now working on this and and revolutionizing kind of our our existing payment networks and payment rails. You know, Chris Dixon has a really good article about like crypto's what's at what's at moment for, you know,

basically taking all of these payment networks that are, you know, could take cost you 10% to send money abroad, right? And payment networks make it so that you can send money anywhere in the world for basically less than a cent. That's a huge unlock. >> [snorts] >> This is more focused on clarity is more focused on on network tokens. And the way that it defines network tokens really are are kind of like if you think about how a share of stock gives you ownership of a company, right? A network token gives you ownership of a blockchain network, right? And and that's the way to think about it. And so, that that's an important distinction because the difference between those two is that when you own a share of stock, you're basically putting your trust in management of that that company, right?

To to deliver that value. With respect to a network token, you really just own the network directly. There is no person that sits in between, right? And so, as those networks function, you can accrue value. Your your token can is basically just ownership of that network directly. So, what what clarity seeks to do is it it divides, you know, puts network tokens firmly in the camp of being, you know, what we call digital commodities. That means they're outside of securities laws, right? And they're now into this new regulatory framework that this bill establishes. And that's really important because right now, you know, for the legacy portion of the industry's history, right? It's been unclear whether or not they fit in that bucket, a commodities bucket, or in the securities bucket. And so, there was no real way, you know, to operate in the

securities bucket. That meant that you had to have centralized intermediaries kind of destroying the value proposition of of blockchain networks themselves, right? Uh and then, you know, but if they were in commodities land, they were totally unregulated and, you know, no disclosure, no transparency, all sorts of stuff. And so, you end up with, you know, rife with scams and frauds and all sorts of stuff like that. So, this puts a takes a lot of the learnings from securities laws, applies them to this commodities context, this digital commodities context, and gives us kind of rules of the road for how we can build these systems, which is is super important. So, what I would say is if you if you want to bucket at a high highest level, right? Clarity creates a framework where it's you got digital securities. So, those are just securities that are tokenized and put on

chain, right? You can create tokens that represent anything. So, you can have them represent shares of stock. Those are digital securities. You then have digital commodities, which are network tokens, meme coins, things like that, which which are, you know, highly tradable assets um that that, you know, some of them, like network tokens, represent interest in networks. Meme coins are are, you know, inherently valueless. Um uh but are, you know, things that people like to trade. Then there's per- permitted payment stablecoins. Those are what Genius regulates. And then there's kind of another bucket that that continues to kind of not get not get a ton of clarity here, which is, you know, things like NFTs, um you know, digital tools, uh assets that that, you know, really give you kind of a that that are used to represent, you know, IDs, things like that. And And those are are kind of

continued to be a little bit of a of an unclear area, but um they were always a little bit less uncertain in how their regulatory treatment was. So, it's less of a problem. >> What about liability? Like for a fully decentralized organization or other, like totally decentralized finance, like who is found liable if something goes wrong? >> Well, I mean, I think the way that to to to think about it, right, is is in the context of what what do blockchain networks actually enable, right? And I I would say that the one of the key things is they allow for individuals to transact peer-to-peer, right, on a trustless basis. And so, if if you and I were to, let's say, trade a Pokémon card, right, who would we hold liable if that transaction went wrong? Well, it's it's between you and me, right? And as a

result, there there we shouldn't be looking to a third party for some type of liability associated with that. Blockchain rails are are really just the the infrastructure on which people can now engage in more peer-to-peer transactions and therefore remove a lot of the risks that have inherently required intermediaries in the past. And so, what what they fundamentally do, right, is guarantee like a trustless, permissionless system where people can transact, where you don't introduce intermediaries that that that create a lot of conflicts of interest risk, right? You know, if you're trusting someone to If you and I were were trading Pokémon cards, but we were doing through so through an intermediary, we would have to trust that that intermediary is not going to take that Pokémon card and just disappear, right?

And so, by removing that middleman, you remove a lot of the risk associated with transacting. And as a result, you know, that that environment kind of we think um is much more favorable to the end user and and is also much more efficient. >> Right. So, tell us a little bit more about the uh SEC versus CFTC split. Uh so, why does this make sense and how is this um you know, going to solve a lot of problems with like regulating and overseeing? >> Sure. So, you know, again, I think the the the the difficulty that the industry always had with the classification of of digital assets like Ethereum or Bitcoin as a, you know, as a a security, right, or an investment contract, is that the the securities laws inherently assume and force control

over those underlying systems, right? The reason that Bitcoin um you know, is valuable and that people ascribe a lot of value to it is that that no one can change the rules by which that system operates. There are 21 million Bitcoin. There are always going to only ever be 21 million Bitcoin. No one can change those those rules. And so as a result, right, people view that that that value, that certainty that there will only ever be 21 million as something you can value. Compare that to the US dollar where the US government can just print more dollars, right, and that's why we have inflation and all sorts of things, right? So, people put a lot of value in the idea that that hey, this system isn't controlled, can't be changed by anyone.

But that's fundamentally at odds with how securities laws work. There's no one that sits in the middle that controls the system, that can change the rules. So, how do you how do you have a system like Bitcoin operate within in the bounds of securities laws? There's no real way to do it. And so by by by necessity, in order to comply with securities laws, you would have to have someone control that network, thereby defeating the the purpose of of the blockchain itself. So, the industry always took a very kind of harsh view of securities laws and and kind of it destroyed the value of the technology.

So, what what Clarity seeks to do, right, is is take some of the the the benefits and the protections of securities laws, like like disclosure requirements, right, and apply those in the context of these assets, but not treat them like securities. Instead, it treats them like commodities saying, "Hey, these things actually, you know, they're not controlled, they don't need to be controlled by someone, but we still want to have some transparency, some disclosures around them. So, you know, people that are investing in them aren't getting rug pulled by, you know, entrepreneurs that are, you know, claiming to to not have control over the system, but actually do." And so what what Clarity does is is set up a lot of the, you know, framework of securities laws, but applies it in the context where you don't need to continue to retain control, thereby allowing the the

kind of purpose and the benefits of the technology to persist, right, but still providing protection to consumers, which is obviously super important. >> Right. Well, that is super important. Hopefully, the Clarity Act gets passed soon. Thank you so much, Miles, for coming on MTS. >> Thanks a lot, guys. Good talking to you. >> Absolutely. >> All right, great to chat. >> [music] [music] >> Mhm.