The CLARITY Act: Could Regulatory Reform Create New AML Blind Spots?
For years, the United States and its international counterparts have struggled to answer one of the more fundamental questions surrounding cryptocurrencies: Who is responsible for regulating the digital asset markets? This ongoing lack of a clear regulatory jurisdiction between the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC); the two primary federal regulatory agencies that oversee the United States financial markets – has created uncertainty for investors, financial institutions, and blockchain innovators alike and to some extent stifled the mainstream adoption of cryptocurrencies as legitimate payment methods. As a result of these uncertainties, the Digital Asset Market Clarity (CLARITY) Act was introduced in May of 2025 as part of an effort to establish a comprehensive regulatory framework for digital assets moving forward. Should it ultimately be enacted, the measure, which has already advanced through the U.S. House of Representatives and the Senate Banking Committee, would provide a direct outline on oversight authority between the SEC and the CFTC for digital commodities and tokenized assets. It would also set registration, consumer asset protection, record-keeping, and anti-money laundering (AML) standards for centralized custodial exchanges and secondary market intermediaries, each addressed as areas in need of specific regulatory reform.1
However, like all new pieces of legislation, the CLARITY Act has both supporters and detractors. Its supporters argue that the legislation will finally provide long-awaited rules that will encourage innovation, keep blockchain companies in the United States, and will expand Bank Secrecy Act (BSA) obligations to many digital asset intermediaries for purposes of strengthening fraud prevention measures. The Act would also increase funding available to the Treasury’s Financial Crimes Enforcement Network (FinCEN) to improve tracking and the ultimate apprehension of those utilizing digital assets for illicit purposes while bolstering the government’s anti-money laundering (AML) agenda as a whole. It would also theoretically help to improve coordination between regulators and law enforcement for bringing those abusing these markets to justice. Critics however believe the legislation may unintentionally create new vulnerabilities, particularly within the realm of decentralized finance (DeFi); that sophisticated criminal organizations, terrorist financiers, and sanctions evaders can exploit for years to come.
Decentralized finance presents a fundamentally different challenge for regulators than those posed by traditional financial institutions operating under well-established AML requirements. Banks, broker-dealers, money services businesses, and many other financial service providers have long been tasked with identifying customers at time of account opening, monitoring transactions, reporting suspicious activity, and maintaining comprehensive compliance programs under the BSA. Unlike centralized exchanges, many DeFi protocols operate through self-executing smart contracts with no traditional management structure, customer onboarding process, or central operator. Transactions occur pseudonymously, often across multiple jurisdictions, making tracking these moves significantly more difficult for investigators, and making crypto particularly attractive to bad actors seeking to launder funds or circumvent sanctions. While blockchain technology does provide unprecedented transaction transparency, identifying the individual’s controlling wallet addresses frequently requires centralized intermediaries or extensive forensic analysis. As a result, this raises an important question for policymakers:
If no entity is legally responsible for AML compliance, then who bears responsibility for preventing illicit financial activity through crypto markets? This lies at the center of the debate surrounding the CLARITY Act and opens the most significant loophole in its defenses.
Arguably the most controversial aspect of the legislation is how it defines the entities responsible for complying with AML obligations. As it currently stands, the bill’s definition of which crypto businesses must comply with Bank Secrecy Act requirements is very narrow, leading many to believe that this framework could exclude many decentralized finance platforms from registration and AML obligations; solidifying a regulatory gap rather than closing one. If those concerns prove accurate as the bill moves through the Senate, critics warn that some DeFi protocols could continue facilitating large volumes of potentially illicit financial activity without customer identification programs, suspicious activity reporting, or sanctions screening comparable to those imposed on traditional financial institutions.
Over the past several years, blockchain analytics firms and U.S. law enforcement have documented the increasing use of digital assets in ransomware payments, sanctions evasion, terrorist financing operations, drug and human trafficking proceeds, and pig butchering investment fraud, amongst other cases. Many of these schemes increasingly rely on decentralized protocols, cross-chain bridges, crypto blenders and mixers, and other technologies specifically designed to reduce reliance on centralized intermediaries. From an AML perspective, every compliance obligation removed from the ecosystem potentially creates another point where illicit funds can move without legitimate oversight. Critics argue that if DeFi protocols remain outside comprehensive AML supervision, sophisticated criminal organizations will naturally continue to migrate toward those less regulated environments. These shortcomings would effectively allow the worst offenders to continue operating in a relatively unregulated environment, while potentially weakening the responsibility of the federal government to impose sanctions on those operating illicitly within this space. This would also extend the Act’s implications well beyond strictly financial crime and into a potential conversation on national security.
The Act’s supporters strongly reject this interpretation however, arguing that the legislation specifically applies AML obligations to digital asset brokers, dealers, and exchanges while preserving innovation for decentralized software developers who do not control customer assets. They also contend that centralized intermediaries interacting with DeFi remain subject to compliance requirements and that the legislation specifically targets fraud, sanctions evasion, and illicit finance. This debate further places a premium on just which actors within decentralized ecosystems ultimately will fall under the Act’s reach.
Regardless of whether the CLARITY Act ultimately becomes law in its current form, the regulatory conversation will likely not end there. Many major pieces of financial legislation shaping the U.S. financial system have ultimately evolved after their implementation. This list includes the Bank Secrecy Act itself, as well as the USA PATRIOT Act, Anti-Money Laundering Act of 2020, and Corporate Transparency Act; each of which undergoing years-worth of regulatory refinement before reaching their current forms. All told, the CLARITY Act represents the most consequential attempt to regulate digital assets in American history. Whether viewed as a necessary modernization of financial regulation or as legislation containing unresolved AML vulnerabilities depends largely on how its provisions are interpreted and eventually amended and/or implemented.
Citations
1. U.S. House Committee on Financial Services. The CLARITY Act: Establishing New Rules of the Road for Digital Assets. 17 July 2026.