Crypto’s push into Wall Street suffers setback after Clarity Act fails to clear key vote

The Senate failed to pass the Clarity Act on Sept 15, sending cryptocurrency stocks tumbling.

WASHINGTON – Crypto’s long march into mainstream finance took a step backwards on Sept 15 when the Senate failed to advance the Clarity Act, denying the industry a chance to turn its newfound influence in Washington into fresh rules that could outlast the current administration.

Crypto exchange Coinbase Global Inc closed 10 per cent lower, while stablecoin issuer Circle Internet Group Inc declined more than 11 per cent.

Bitcoin, the largest cryptocurrency, dropped as much as 5.3 per cent to below US$75,000 after the Bill failed in a procedural vote.

Odds for the Bill passing had plunged in recent months as key Democrats lined up against it, but its defeat hardly explains crypto’s broader malaise.

The euphoria around artificial intelligence has drawn away retail attention, while tighter liquidity and weaker appetite for risk have prolonged the bear market.

Clarity offered something different: its passage would have given market participants a clearer understanding of the legal parameters governing the industry and a well-defined pathway for companies deciding whether to invest, expand or strike deals in the US.

Now, much of that work falls to the US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).

Under the Trump administration, the SEC and CFTC have moved to ease restrictions on digital assets. Their rules, however, could prove easier for a future administration to change.

“The failure puts the ball in the hands of the regulators,” said Austin Campbell, a crypto expert and former banker who is now an adjunct professor at the NYU Stern School of Business in New York. “And while they can make rules, those are less stable and permanent than legislation.”

Crypto had been on a winning streak in Washington.

The industry spent heavily to build political clout, and Republicans made extensive changes to Clarity in a last attempt to pick up Democratic votes.

Among them were tougher ethics provisions covering elected officials’ crypto holdings. The issue had become particularly contentious given the financial ties of US President Donald Trump and his family to the industry. 

It still was not enough. With the midterms approaching, Democrats were being asked to vote for a Bill strongly backed by an industry that has added substantially to Trump’s wealth. 

For Wall Street firms already deep in crypto, little changes immediately.

“This doesn’t affect our current plans or our strategy,” said Robbie Mitchnick, head of digital assets at BlackRock, who has the largest US spot Bitcoin exchange-traded fund.

The industry uncertainty is greater for investments that have not been made yet, from acquisitions to new businesses and US expansion.

“What happens if the Democrats take the House and the Senate” in the midterm elections, said Larry Tabb, global head of financial sector research at Bloomberg Intelligence.

“That opens up a lot of risk for people that really want to make a substantial investment, it could conceivably be taken away with the stroke of a pen.”

Clarity’s failure to advance removes one potential boost for a market already struggling through an extended slump.

“If Clarity had passed, crypto would have been the consensus smart money trade in Q4,” said Matthew Hougan, chief investment officer at Bitwise Asset Management.

“It would have been a rip-roaring bull market. With Clarity failing it’s a more challenging market. I am still bullish we’d end the year higher, but it would be a bit slower. I don’t think it delays the bull market; it’s more of a speed bump than a road stop. It would have been better for crypto if it passed.”

The agencies can keep writing rules without Clarity. The industry has been through a change in Washington before.

Coinbase and other major crypto firms were fighting SEC lawsuits only a few years ago; regulators under the current administration later dismissed them.

Clarity would have resolved some of the legal questions behind those fights, including which digital assets are securities or commodities and which agency oversees them. Without the Bill, regulators and the courts will have more influence.

“The longer this takes, the more the question shifts from whether capital moves to how much of it the US keeps,” said Javier Martinez, chief executive at sFOX, a digital-asset dealer and trading platform.

The uncertainty could also delay acquisitions of crypto exchanges, custodians and asset managers by traditional financial companies.

Brian Dixon, chief executive of Off the Chain Capital, a fund that invests in crypto companies, said prospective buyers want greater regulatory certainty before committing to large acquisitions.

The SEC and CFTC could eventually provide much of that clarity themselves, but agency rule-making takes time and could face court challenges or reversal under a future administration.

“Regardless, we are going to get regulatory clarity; it’s just the timeline,” Dixon said.

Banks themselves complicate that picture. They fought parts of Clarity, particularly provisions involving stablecoin rewards that they argued could draw deposits away from traditional lenders.

Some traditional financial firms are also prospective buyers of the crypto businesses whose future the legislation was meant to clarify.

“Next Congress – if they took this up, and if political makeup of Congress changes – then you will not have the bill the way it’s written now,” said Chris Hayes, a partner at Thorn Run Partners, a lobbying firm.

“You might not have a Bill, and it might be less favourable to what the industry would like under Democratic control of House or Senate. It exposes them to risk in the future in the longer term.” BLOOMBERG