The chances of passing the CLARITY Act get slimmer with each passing day, leaving crypto users, particularly industry stakeholders, concerned over what could become of the regulatory ecosystem. A tightening US legislative calendar and political gridlock ahead of the August recess have reduced the probability of passing the Act to around 27%.
Many crypto community participants have begun considering what the future may hold if the CLARITY Act fails to meet its deadline, or if US lawmakers do not pass the bill into law. Any of these scenarios would redirect the industry back to the SEC’s regulatory supervision regime. Therefore, crypto users facing this reality are reconsidering the extent of the SEC’s authority, in the event the CLARITY Act is denied or stalls further.
The SEC’s Rulemaking Jurisdiction
The Securities and Exchange Commission (SEC) derives its primary authority from the Securities Act of 1933 and the Securities Exchange Act of 1934. Under existing laws, the SEC’s jurisdiction centers on regulating investment contracts, which the Supreme Court defined in the landmark SEC v. Howey case using a strict four-part test.
Under existing laws, the SEC is obligated to oversee some areas of the cryptocurrency ecosystem, including:
Administrative Rulemaking
The SEC possesses delegated authority from Congress to make rules clarifying statutory laws to cover “Notice and Comment,” requiring the Commission to publish proposed rules for public feedback under the Administrative Procedure Act (APA). The agency is legally required to analyze the economic impact of any new rule, and the courts would have to strike down rules if the SEC fails to provide a rational connection between the facts found and the choice made.
Registration Exemptions
Existing laws mandate that all security offerings must be registered unless an explicit exemption applies. This includes “Private Placements” that allow capital raises without public registration, “Mini-Public Offerings” that permit scaled public offerings up to $75 million with simplified disclosure requirements, and “Regulation Crowdfunding,” which allows startups to raise up to $5 million from retail investors through registered funding portals.
Safe Harbor Rules
The SEC’s Safe Harbor Rules provide market participants with legal certainty by defining specific conduct that does not violate securities laws. It protects corporate insiders by establishing predetermined, automated schedules for buying or selling company stock. It also creates a safe harbor for the public resale of unregistered securities if specific holding periods are met. However, it is crucial to note that existing laws lack a formal safe harbor for decentralized digital assets, leaving a structural gap that the proposed CLARITY Act attempts to fix.
Custody Rules
The SEC enforces strict asset-segregation boundaries to protect investor funds from broker or adviser bankruptcies. Under the Investment Advisers Act of 1940, registered advisers must maintain client funds with regulated banks, broker-dealers, or trust companies. However, recent SEC regulatory expansions aim to require qualified custody for all client assets, including crypto, commodities, and real estate.
Exchange Regulations
Existing SEC regulations require every platform operator that facilitates securities trading to register with federal regulators. The 1934 Act requires platforms to register, establish self-regulatory rules, and maintain fair and orderly markets. The platforms can also operate under a lighter regulatory regime via Regulation Alternative Trading Systems (ATS) if they do not execute trades or set market rules directly.
Court Challenges and Legal Overreach
Crypto establishments often run to the courts for protection if they feel the SEC may be overreaching its enforcement powers. The courts can block major SEC rules if the agency lacks explicit, clear congressional authorization for matters of vast economic or political significance. Recent federal court rulings have established that a digital asset token itself is not inherently a security, though its initial institutional sale might constitute an investment contract. On multiple occasions, federal appellate courts have vacated SEC rulemakings for being “arbitrary and capricious.”
SEC Chair Says the Agency is Ready to Intervene
Amid ongoing delays in passing the CLARITY Act, SEC Chair Paul Atkins has stated his Commission’s readiness to write alternative regulations for the crypto industry. Atkins said during a CNBC interview that the agency is “ready, willing, and able to come out with rules” covering the same ground and would stand ready to provide that should the bill not clear the Senate.
Atkins noted that statute is the way to future-proof something, adding that the market needs that certainty to avoid the framework shifting with each administration. However, he expressed optimism over the Senate passing the bill, noting that the SEC is providing the legislature with technical assistance.
The SEC’s Rulemaking Limitations
Despite Atkins’ claims, there is a limitation to how far the SEC can go in establishing a robust regulatory framework for the crypto industry. Several issues are beyond the Commission’s jurisdiction and are only for Congress to decide. The issues beyond what the SEC can handle include:
SEC vs. CFTC Jurisdiction
The SEC does not have the legislative authority to divide oversight boundaries between itself and another independent agency. The agency cannot strip itself of jurisdiction over an asset that fits the historical Hawey Test. Although the SEC and the CFTC can issue joint interpretations, only Congress can grant the latter exclusive jurisdiction over digital commodity spot markets.
Commodity Token Definitions
The SEC does not have the authority to create a formal pathway to reclassify a security into a non-security. It cannot invent a binding “Certification of Decentralization” that legally strips an asset of its security status, nor can it dictate which secondary-market assets qualify as “digital commodities” without clear legislative criteria defined by Congress.
Legal Definition of Digital Assets
Creating broad, legally binding definitions that apply across the entire federal government is beyond the SEC’s jurisdiction. The agency’s definitions only apply to federal securities laws. Therefore, its internal classifications do not bind other federal bodies such as the banking regulators, the Treasury, or the IRS.
Federal Market Structure
Existing laws do not permit the SEC to restructure Wall Street’s financial plumbing to accommodate blockchain technology. Rather, they entail a strict separation between broker-dealers, exchanges, and clearing houses. Under these laws, the SEC cannot allow a single crypto platform to integrate all three functions without horizontal restructuring. It is an exclusive responsibility of Congress to enact laws governing how decentralized clearing houses operate at the national scale.
Stablecoin Legislation
Only Congress can regulate payment stablecoins, which primarily mirror banking products. Such fixed-value tokens are not classified as securities because they lack an “expectation of profit.” Also, the SEC cannot legally impose capital reserve requirements, audit standards, or liquidity rules on stablecoin issuers. That is the sole responsibility of Congress.
Consumer Protections
Administrative rules are limited and cannot adequately protect retail investors. They lack the capacity to provide comprehensive, modern safety nets in this regard. Current laws do not allow the SEC to mandate or build a federal insurance pool tailored specifically to safeguard retail crypto deposits against exchange bankruptcies. The agency cannot assert aggressive, non-securities consumer-protection rules over offshore platforms targeting domestic users.
Tax Provisions
The state’s Internal Revenue Code is absolutely outside the SEC’s jurisdiction. The agency lacks the capacity to close crypto tax loopholes or modify tax reporting requirements for digital assets. The task of changing how digital asset transactions are taxed remains with Congress, meaning any SEC-led market framework would remain completely disconnected from federal tax realities.
Conclusion
Amid the CLARITY Act delays, the SEC chair’s idea of having his agency independently create alternative rules for the crypto industry may only be a stop-gap, temporary solution. Despite the SEC’s technical abilities in rulemaking, it does not have the authority to overshadow other agencies and jurisdictions. Therefore, if the Senate does not pass the CLARITY Act, it could delay substantive regulation of the crypto industry, leaving the issue still open-ended.
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