The debate over the CLARITY Act, a legislative proposal currently under consideration in Congress, has reignited a fundamental tension between national security, financial regulation, and the preservation of an open, permissionless internet. At the heart of this conflict is Section 109 of the bill—which incorporates language from the standalone Blockchain Regulatory Certainty Act (BRCA)—and its specific protections for software developers. Critics, including former White House official Carole House, argue that these protections create an accountability gap, while proponents contend that the bill correctly aligns regulatory burdens with actual control over financial transactions.
The central point of contention rests on the interpretation of a single, albeit potent, slogan: Accountability follows power. While House argues that this principle necessitates the existence of an identifiable intermediary for all powerful software systems, proponents of the CLARITY Act maintain that the legislation is, in fact, a faithful application of that very principle. The bill seeks to establish a functional test to distinguish between entities that exercise unilateral control over user assets and those that merely publish software which users operate independently.
The Legislative Context and Chronology
The genesis of the CLARITY Act is rooted in the long-standing efforts to modernize the Bank Secrecy Act (BSA) for the digital age. Since the early 2010s, regulators, specifically the Financial Crimes Enforcement Network (FinCEN), have grappled with how to apply traditional anti-money laundering (AML) and counter-terrorist financing (CTF) frameworks to decentralized technologies.
In 2014, FinCEN issued administrative guidance clarifying that the production and distribution of software, in and of itself, does not constitute the acceptance and transmission of value, which would otherwise trigger money transmitter status. This stance was reaffirmed in 2019, emphasizing that the application of financial regulation should depend on the underlying activities performed—the functional role—rather than the labels assigned to the technology.
The CLARITY Act seeks to codify these administrative positions into federal statute. By providing clear harbor for developers who lack the "legal right or unilateral and independent ability to control, initiate on demand, or effectuate transactions involving users’ assets," the bill aims to provide regulatory certainty. Without this legislative shield, industry participants fear that developers could be treated as money transmitters simply by writing and publishing open-source code, a prospect that has prompted warnings about the chilling of protected speech and innovation.
Functional Testing vs. Status-Based Regulation
The distinction between the proposed legislation and traditional regulatory approaches is stark. House and other critics suggest that the current proposal leaves a "loophole" for illicit activity. However, legal analysts point out that the bill does not grant blanket immunity. It specifically preserves the authority of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to pursue cases of fraud, market manipulation, and other criminal conduct.
The "functional test" proposed in Section 109 is designed to move away from status-based regulation. Under this framework, an entity is regulated as a financial institution only if it functions as one—by holding, moving, or exercising control over customer funds. If a developer releases software that permits users to interact with a network without the developer’s ongoing participation, the developer is not acting as an intermediary in the traditional sense.
Comparing this to existing financial infrastructure like Visa or Mastercard provides clarity. Visa and Mastercard operate as centralized entities that establish network rules, admit or exclude participants, and monitor activity to prevent fraud. They hold the "power" to deny access. Conversely, a developer who publishes a self-custody wallet or contributes to a decentralized protocol lacks the authority to unilaterally freeze a user’s funds or reverse a transaction. To impose the same regulatory obligations on these two distinct categories of actors is a fundamental shift in administrative law that would effectively require the re-engineering of the entire digital economy toward a surveillance-heavy model.
The Section 230 Analogy and Internet Governance
The discourse surrounding the CLARITY Act has frequently invoked Section 230 of the Communications Decency Act, which protects online platforms from liability for third-party content. While critics view this as a cautionary tale of "over-protection," proponents argue that the comparison is fundamentally flawed.
Section 230 was a cornerstone of the 1990s and early 2000s that allowed the modern internet to flourish by preventing infrastructure providers from being held responsible for the speech of every user. The Government Accountability Office (GAO) noted in a 2021 report that when exceptions to this protection were introduced, the result was not necessarily increased accountability, but rather the migration of activity to more opaque, offshore jurisdictions. This "fragmentation" makes it significantly more difficult for law enforcement to track illicit activity.
Applying this logic to financial technology, supporters of the CLARITY Act argue that forcing software developers to build "backdoors" or "surveillance hooks" into their code will not stop bad actors. Instead, it will drive the development of these tools further underground, beyond the reach of U.S. law enforcement, while simultaneously crippling domestic innovation and competitive markets.
Implications for Artificial Intelligence and Future Policy
The debate extends beyond the immediate concerns of cryptocurrency to the broader, emerging field of artificial intelligence (AI). House has warned that the precedents set by the CLARITY Act could influence how the government regulates AI developers. If the government adopts a policy requiring that every piece of powerful software must be "controllable" by its creator, the implications for the technology sector would be severe.
Such a requirement would necessitate that software be designed with the capability for surveillance and remote intervention. For truly decentralized systems, such as Bitcoin or open-source AI models, this is a technical impossibility. Therefore, the logical conclusion of the "accountability" argument, if taken to its absolute extreme, is that the government must either prohibit these systems entirely or mandate that they be redesigned around a controllable intermediary.
This "forced reintermediation" represents a significant departure from the 1997 Framework for Global Electronic Commerce, established during the Clinton administration. That framework explicitly favored "bottom-up governance" and cautioned against "inflexible and highly prescriptive regulations" that would inhibit the growth of new electronic payment systems. By contrast, the current push for pervasive surveillance in software design mirrors the concerns surrounding telephone wiretap mandates, where the infrastructure itself is designed with state-access as a primary feature.
Data and Regulatory Reality
The Congressional Research Service (CRS) has provided an overview of the bill, confirming that the exclusion of certain decentralized activities from money-transmission law does not waive the applicability of broader federal criminal statutes. The bill’s text does not protect those who knowingly facilitate money laundering, sanctions evasion, or terrorist financing. It merely clarifies that the act of writing code is not, by itself, an act of financial transmission.
The financial industry currently faces significant compliance costs associated with the Bank Secrecy Act. For large, centralized entities, these costs are a standard barrier to entry. However, applying these costs to individual developers or small, decentralized teams is effectively a prohibitive tax on open-source participation. As the U.S. continues to compete globally for technological leadership, the balance between safety and openness remains the most critical variable.
Conclusion: The Future of Digital Infrastructure
The conflict over the CLARITY Act is not merely a technical disagreement over regulatory definitions; it is a profound debate over the nature of a liberal, democratic society in the digital age. The argument that "accountability should follow power" is broadly accepted across the political spectrum. However, the interpretation of where that power lies determines the outcome.
If power is defined as the ability to control, censor, or monitor transactions, then the regulatory focus should remain on those who possess such capabilities—banks, exchanges, and custodians. To extend this definition to the authors of software code—who merely provide the tools for users to exercise their own autonomy—is to conflate proximity with power.
As lawmakers prepare to move forward with the legislation, the consensus among industry advocates is that the goal of robust financial security can be achieved without necessitating a "financial panopticon." By protecting non-controlling developers, the CLARITY Act seeks to preserve the decentralized architecture that has historically fostered innovation, provided for financial inclusion, and guarded against the overreach of both private monopolies and state entities. The challenge for the 119th Congress will be to ensure that in their pursuit of accountability, they do not inadvertently dismantle the very structures that enable the modern, open digital economy to exist.
