U.S. Digital Asset Law May Classify Non-Native Tokens as Securities
Yesterday, House Financial Services Committee Chair French Hill introduced the Digital Asset Market Clarity (CLARITY) Act, a bipartisan bill aimed at regulating digital assets. The bill has garnered support from five Republican co-sponsors and three Democrats.
The bulk of the supervision responsibilities for the CLARITY Act will rest with the Commodity Futures Trading Commission (CFTC). The CFTC, historically more involved with derivatives and commodities, will now have a broader mandate, including digital assets.
The CLARITY Act defines a digital commodity as a token that is closely tied to a blockchain network. Transactions involving the primary sales of digital commodities on a "mature" blockchain system are exempt from securities laws, but this exemption only applies to US-based issuers.
The CLARITY Act establishes a three-tier token taxonomy and maturity test. Tokens start as securities while their blockchain is controlled by a person or group. However, they can transition to being classified as commodities once the blockchain achieves full decentralization or "maturity" within a 4-year timeline. This means non-native tokens can move from stricter securities regulation to lighter commodity regulation once maturity is certified, potentially easing ongoing compliance burdens.
Projects can raise up to $75 million annually through a streamlined SEC exemption if they meet disclosure standards and pursue decentralization milestones. This encourages early-stage innovation and funding of new blockchain projects while maintaining regulatory transparency.
Once tokens mature, secondary market trading no longer treats those tokens as securities, improving liquidity and institutional participation. Insider trading lockups and volume limits help prevent manipulation in early phases but relax post-maturity, which promotes market stability during new blockchain launches.
The CLARITY Act also establishes federally regulated Digital Commodity Exchanges (DCEs), removing complex state licensing, which benefits projects launching new blockchains and tokens by providing a clearer, unified market structure.
The legislation ensures investors have the right to choose to self-custody their assets. It updates the definition of an "investment contract" to exclude "investment contract assets", which are digital commodities sold pursuant to an investment contract.
The CLARITY Act may inadvertently encourage blockchain proliferation as projects seek the lighter regulatory treatment afforded to digital commodities by potentially classifying non-native tokens as securities. It is perhaps a coincidence or unfortunate timing that all four current CFTC commissioners are planning to step down.
Two high-profile utility token issuers, Uniswap and Ondo Finance, have recently launched their own blockchains. The CLARITY Act distinguishes between whether the digital asset itself is an investment contract versus certain transactions.
In summary, the CLARITY Act creates a regulatory path that encourages the development of new blockchains and non-native tokens, facilitating capital access through exemptions, clarifying securities vs. commodity status based on decentralization, and potentially lowering long-term regulatory risks after the blockchain achieves maturity. This can accelerate innovation and institutional involvement in emerging blockchain projects.
Stablecoins, as digital assets, fall under the jurisdiction of the Commodity Futures Trading Commission (CFTC) due to the CLARITY Act's definition of digital commodities. The act also establishes Digital Commodity Exchanges (DCEs) to provide a clearer, unified market structure for blockchain projects seeking to raise funds through the sale of non-native tokens. Investors will have the right to self-custody their assets, while the act updates the definition of an "investment contract" to exclude "investment contract assets." This legislation may inadvertently encourage more projects to create their own blockchains, potentially lowering long-term regulatory risks after maturity. In addition, news about Uniswap and Ondo Finance launching their own blockchains highlights the interest among projects in transitioning from securities to commodity regulation, a process facilitated by the CLARITY Act.
