Key facts
- A coalition of Catholic organizations and law enforcement groups are opposing the CLARITY Act's DeFi provision.
- Concerns center on Section 604, which aims to exempt non-custodial developers from money transmitter classification.
- Opponents argue this could create oversight gaps and hinder investigations into illicit finance, including human trafficking.
- Proponents, like Senator Cynthia Lummis, argue the provision clarifies that writing code is not money transmission and closes gaps exploited by criminals.
- The CLARITY Act is scheduled for a House hearing on July 17.
A coalition of Catholic organizations, including the Alliance to End Human Trafficking (AEHT), and four law enforcement groups have voiced opposition to a provision in the U.S. CLARITY Act, which is heading for a key House hearing on July 17. The groups are concerned that Section 604 of the bill, which aims to exempt non-custodial software developers from being classified as money transmitters, could create oversight gaps and hinder investigations into illicit activities.
The law enforcement coalition, comprising the National District Attorneys Association, National Association of Assistant United States Attorneys, International Association of Chiefs of Police, and National Sheriffs’ Association, sent a letter to White House officials expressing worries that the provision would weaken know-your-customer and anti-money-laundering requirements compared to traditional finance. They stated that while they support technological innovation, broad exemptions could shield entities facilitating digital asset movement and obstruct legitimate oversight.
Similarly, the Alliance to End Human Trafficking highlighted that Section 604's potential carveouts and ambiguities could make it more difficult to monitor illicit financial activity tied to trafficking, organized crime, child exploitation, and sanctions evasion. They emphasized that a financial system's true test lies in its safeguarding of human life and dignity.
However, proponents of the CLARITY Act, such as Senator Cynthia Lummis, argue that regulatory ambiguity benefits criminals and that the bill clarifies that writing code is not money transmission. Lindsay Fraser, chief policy officer at the Blockchain Association, stated that Section 604 narrowly prevents non-custodial developers from being misclassified and does not immunize criminals or limit sanctions enforcement.
The CLARITY Act aims to establish a regulatory framework for digital assets and previously cleared the Senate Banking Committee in May, with most Democrats voting against it. The banking industry has also expressed concerns that the bill could allow crypto firms to offer stablecoin yields without facing the same requirements as traditional financial institutions.