The Clarity Act: What It Means for Developers

Transcript

[applause] >> Hello everybody. Thank you so much for being here today. Um so I am Lindsey Fraser. I lead policy at the Blockchain Association. Um we are a nonprofit that advocates for the digital asset industry in Washington, D.C. You can see on the screen here our list of members. We have over 100 different member companies who are all building the most innovative technologies in the blockchain space. Um and I cannot think of a better time to be discussing the Clarity Act, market structure, and what it means for developers. Yesterday, the Blockchain Association brought over 30 of our

member companies to Washington, D.C. And in one day, we met with 52 different Senate offices. So if I appear a little tired, um it's because yesterday was a very long day, but also very important. Um and there is active negotiations and updates happening right now. Um so it's a great time to chat a little bit about how market structure is going to impact developers here in the United States. And so to start, the Clarity Act. Um to kind of go over at a high level what the Clarity Act aims to do. Um that is the the current name for market structure legislation moving through the US Senate right now. Um this isn't the first time that the US has contemplated market

structure legislation. There's been previous iterations dating back to 2020. Um so the Clarity Act is really um a result of years and years of bipartisan effort in moving forward a bill that can provide clarity for the digital asset industry. Um and this iteration is very aptly called the Clarity Act. And essentially what it does falls high level into three buckets. Um so first, token classification, trading, and marking and market rules. Um, as I'm sure people in this audience have experienced and and we all will never forget the Gary Gensler era at the SEC, but um, not having clear rules around like token classification has made it nearly impossible for people to build in the

US, and that is kind of the first step of what this market structure bill does. It also provides requirements for various intermediaries in the digital asset space, outlining their requirements for registration with both the SEC and CFTC, and various consumer protection um, related measures that we see with traditional financial institutions. And then, the last bucket I would say is the developer rules or protections. And so, this outlines what software builders what activity software builders are or also are not regulated for. Um, to me, as mentioned before, I used to lead policy at Uniswap Labs. Um, and so, you know, protecting DeFi builders and

infrastructure has always been incredibly important to me, and that is really right now kind of the crux of the debate going on in Washington. And so, I will spend the rest of of this talk kind of getting into exactly what that looks like. Um, at a high level, why clarity matters for developers. I'm sure a lot of you have experienced this first hand, but for years, developers have lacked clear answers to fundamental questions, including is publishing code a regulated activity, even if it's non-custodial, non-controlling, is operating front end regulated activity, um, is participating in governance a regulated activity.

These are all incredibly important questions that there have not been clear answers to to date. And because of that, we've seen the percentage of blockchain developers vastly decrease over the past 5 years due to the regulatory environment that we saw under the previous administration. And the goal here with Clarity Act is to bring that that back on shore and make the US um the best place to build innovative technologies. And so, the result obviously of this lack of clarity and you know, strategy of regulation by enforcement from the SEC has been a migration offshore, reduced investment just because investors aren't sure what the future of blockchain technology looks like here in the United States, and then delayed

innovation. We're seeing some of the most cutting-edge applications of this technology move overseas strictly because people don't understand what the rules are here and would like to have legal certainty so they're not subject to potentially like criminal violations for what they're building. And so, the goal in the market structure legislation that is moving through the Senate right now is to draw a clear line between building software and operating a financial intermediary, which sounds simple probably to everybody in this room, but um it's not as easy to deal with people who are new to the technology um and are trying to legislate based on you know, something that they're still getting to learn.

So, I'll quickly go over kind of where we're at in the process. Um so, last June we saw the bill go through both the House Financial Services and House Agriculture Committee, and then it moved to the floor for a full vote on the House floor. Um we had a overwhelming bipartisan outcome there with 294 members voting in support including 78 Democrats. Um then we had from July until January um the Senate started working on their version of market structure. A lot of it was taken from the House draft that passed last summer, but there's also a lot of new additions. Um so, we saw the Ag Committee go first, and it if in case you're wondering why the Ag Committee

has a say in crypto policy, it's because of the ties to commodities and the Commodities Future um Trading Commission. And so, the Ag did their portion of the bill uh in January and it voted out of it got voted out of committee with by a vote of 12 to 11 along party lines and then about 3 weeks ago we saw the Senate take on a vote a committee vote on their portion of the market structure bill. We saw two senators on Democratic side vote in support leading to a bipartisan outcome which was really great and kind of where we're at right now is trying to move those two bills. We need to first combine them together and then they need to be introduced on the Senate floor for

a vote and a quick note on Senate procedures in order to bypass the filibuster you need to have 60 votes in order to get a bill up for consideration. So that's kind of the magic number is those 60 votes and as I'm sure people in this audience also know we have an election in November midterm elections. I think the closer we get to elections the trickier it is to introduce you know complicated pieces of legislation for members to vote on. So we really have a very important time period over the next month or so to push for this bill to get on the floor but importantly to push for it to get on the floor with very strong developer protections intact.

And so I'm going to go over quickly at a high level kind of the three core developer protections related provisions. The last one that I'll speak about is the one that's kind of garnering the most public attention right now and where I think input and support from people in the audience could be helpful. But to start I will start with section 601 in the Senate banking version of the bill. So essentially what it does at a high level is it clarifies both the Securities Act of 33 and the Exchange Act of 34 to establish clear protections for developers and infrastructure providers from misclassification as securities registrants. Obviously, what we saw over the past, you know, five years was different notices from

the SEC saying that even in the world of DeFi, people were operating unlicensed exchanges. That is what this is looking to correct. It clarifies that developers who do not custody or control user funds are not financial intermediaries and should not be regulated as such, thus saying that they do not need to register as an exchange, as a broker, as a dealer. That is what section 601 does and it creates this functional statutory protection for developers, but also preserving the SEC authority over true intermediaries.

Then we have section 207 in the agriculture part of the bill. It is pretty much the exact same thing, but just tailored to the Commodities Exchange Act. Again, it touches on those activities that are protected and should not be subject to registration and do not represent any sort of intermediation. I think the key here, it's in both, you know, 601 and 207, is this line of custody and control. When you are developing a technology that serves as neutral infrastructure, does not at any point control user funds, does not at any point exercise discretion or execute transactions on a user's behalf, you should not be

like you should not be recognized as a financial intermediary. And that's what both of these sections do for the respective authorities at the SEC and the CFTC. Getting into what has become one of the more hard-fought battles with this bill, section 604, the Blockchain Regulatory Certainty Act. So, at a high level, what the BRCA does is that it makes sure it makes clear that the non-controlling, non-custodial software developers are not subject to Bank Secrecy Act obligations intended for financial intermediaries and how they get at this is we've actually seen obviously in in the digital asset space developers of D5 protocols and

technologies non-controlling non-custodial protocols actually getting into criminal prosecution for a violation of section 1960 of the criminal code which is a criminal violation for running an unlicensed money services business. But again, when you are deploying a a protocol like the Uniswap protocol for example where there's no control, no custody exercised, you are not a money services business. And what is so scary about what the Blockchain Regulatory Certainty Act aims to fix is that you could you are under the threat of criminal prosecution at any time. There's obviously been public cases of this, but there's also been many private

investigations where you know, founders who are building the most innovative cutting-edge technology in the D5 space have been subject to investigations that have taken months. They've it's cost millions of dollars. And when you're a developer who is thinking about creating innovative technology and that is a threat that exists you probably would think about relocating elsewhere where you're not at risk of going to jail or having to spend millions of dollars on legal fees. And that is what is really important for the BRCA to be included and remain as voted on in the Senate Banking Committee and not get

watered down at all as it gets to the Senate floor. Um also the Blockchain Regulatory Certainty Act isn't a new concept. It is pretty much a word-for-word codification of existing FinCEN guidance which is the Financial Crimes Enforcement Network housed under the Department of Treasury. Um FinCEN issued guidance in 2019 that basically says this exact thing, but it's guidance, it's not binding, it's not law, and we've seen kind of rogue prosecutors who are adversarial against the industry like really weaponized 1960 over the past 6 or 7 years since the FinCEN guidance has been imposed, which is why it's so important

for it to be codified into law. Um I also will note it has been around for a long time. There's been bipartisan iterations of the Blockchain Regulatory Certainty Act in both the House and the Senate. We saw Representative Torres from New York and Representative Emmer, Democrat and a Republican, introduce the Blockchain Regulatory Certainty Act a few years ago. They just reintroduced it as a standalone in the House last year. On the Senate side, Senator Lummis from Wyoming and Senator Wyden from Oregon introduced bipartisan legislation on and it's the BRCA, the House version of the BRCA. That was introduced earlier this year.

I think it's a very good demonstration of how there's support on both sides of the aisle for the Blockchain Regulatory Certainty Act. But a standalone version likely won't get through all the necessary steps to become law, so it's very important that it's part of this broader market structure package. Um and I think at a high level kind of the opposition that we've seen um there's various law enforcement groups, both local and state law enforcement as well as prosecutors who've expressed concern that the BRCA would hinder their efforts by limiting prosecutors' ability to go after illicit activity or limiting investigators' ability to track financial crime. Um I think that in in

the kindest way possible, this represents a complete mischaracterization of what the BRCA does and does not. It does not affect law enforcement or prosecutors' ability to go after any illicit activity. Every single money laundering, fraud, counter-terrorist financing-related provision um that prosecutors are able to use to go after criminal activity still exist, are fully intact, and are actually strengthened by the Clarity Act. Um I don't have time to get into all of the the outstanding sections that deal with law enforcement and prosecutors, but essentially there are two titles of the bill which are over 80 pages in the latest draft of Clarity that are focused on this exact

issue of expanding law enforcement and prosecutors' ability to go after illicit activity in title two and title three. If anyone wants some fun some fun reading um but essentially the the opposition to the BRCA is not based in fact or based in what the the statute actually does, but that being said, when people on the hill hear that law enforcement or prosecutors are against a bill, it's very scary to them and it's super important that we correct this narrative. And so about a week ago now, um we helped put together a letter in support of the Clarity Act, particularly the BRCA and the law enforcement-related provisions, from 160 current and former law enforcement and national security

officials. You can find it on the Blockchain Association's website, but we had a wide range of signatories who countered the point that this bill in any way, shape, or form is bad for US national security and the Blockchain Regulatory Certainty Act is actually pro-national security in the way that it will hopefully onshore this development within the United States. And so we're not pushing, you know, the developers of all these amazing innovative technologies to jurisdictions like China or other adversarial um, regions. And we paired this letter with a sign where we brought in, um, about 20 former law enforcement officials to go

in and meet with these offices directly to make the case of how the Clarity Act as is would benefit them in their jobs. And I think that was a very, very positive, um, it was received very positively by the Hill. And then we also paired that with an industry letter yesterday. So, over 60 CEOs and founders, um, sent this letter to Senate leadership saying that they will not support the bill if the Blockchain Regulatory Certainty Act and the related developer protections are watered down. I think this is a really important message to continue to emphasize, um, with Senate leadership that the industry is aligned. Law enforcement and national security officials who have dealt with this

firsthand are aligned. Developing, or protecting developers, is critical and it should be a priority of the US Senate and the US House. And any bill that gets out of the Senate floor and to the president's desk must prioritize developer protections. It is something that the Blockchain Association cares deeply about. It's something that I care deeply about having having worked in DeFi with developers who are building really amazing things that are going to have really, really tangible impacts for American consumers that these senators and members of the House are serving.

And to the extent that we can con- continue to amplify that message, um, I think it's super important, especially over the next month as the bill moves to the Senate floor. I will end here. If anyone in this room, I think, you know, the I can I can tell you yesterday meeting with, um, many Senate offices, I think they're very tired of hearing my voice. And to the extent that we can highlight stories and experiences from developers and others, um, in the community that can explain why these provisions will help them keep their business in the US or help them to build these amazing technologies or new ideas that you have. Um I really recommend reaching out. Happy

to connect with you all and and figure out how you can get involved in the discussion. Um but it's incredibly important. We're at the precipice of a bill that can be that can un a huge unlock for our industry and we just need to make sure in this final stages that we're doing what we can to protect developers. Awesome. Thank you all very much.