The CLARITY Act Explained: CFTC vs. SEC Jurisdiction Finally Defined

By Chanté Eliaszadeh | June 2025

For years, crypto companies have operated in regulatory purgatory, unable to answer the industry's most critical question: "Is my token a security or a commodity?" The SEC and CFTC have waged a turf war over digital assets, leaving founders, investors, and exchanges paralyzed by uncertainty. That uncertainty may finally be ending.

In May 2025, Congress released a discussion draft of the Crypto-Asset Market Structure and Investor Protection Act—commonly known as the CLARITY Act—offering the first comprehensive framework to divide regulatory authority between the SEC and CFTC. While not yet law, the bipartisan bill represents the strongest consensus to date on how to regulate digital assets without stifling innovation.

This article breaks down what the CLARITY Act means for your token, protocol, or exchange, and what you should do while the legislation moves through Congress.

The Jurisdictional Nightmare Ends

The current regulatory landscape is a jurisdictional maze. The SEC claims most tokens are securities under the 1946 Howey test, pursuing enforcement actions against everyone from major exchanges to DeFi protocols. Meanwhile, the CFTC asserts authority over digital commodities, but only over derivatives markets—leaving spot trading in a regulatory no-man's-land.

This confusion has real consequences. Companies cannot confidently launch products without risking multimillion-dollar enforcement actions. Exchanges operate under permanent threat of SEC subpoenas. DeFi developers flee offshore or abandon projects entirely. The U.S. crypto industry has hemorrhaged talent and innovation to jurisdictions with clearer rules.

The CLARITY Act proposes to end this chaos by establishing bright-line tests for when digital assets fall under SEC jurisdiction (as securities) versus CFTC jurisdiction (as commodities). For the first time, companies would have a predictable framework for compliance instead of regulatory roulette.

How the CLARITY Act Splits Jurisdiction

The bill creates two distinct categories of digital assets, each governed by a different regulator and compliance regime.

Digital Asset Securities (SEC)

Under the CLARITY Act, a digital asset qualifies as a security if it meets any of the following conditions:

Investment Contract Tokens: Assets sold with the expectation of profits derived primarily from the efforts of others remain securities under the traditional Howey test. This includes tokens sold during fundraising rounds where the issuer promises to build products, develop technology, or grow the network.

Equity-Like Rights: Tokens that provide governance rights similar to corporate stock, profit-sharing arrangements, or claims on issuer revenues fall under SEC jurisdiction. If your token mimics equity ownership, expect SEC oversight.

Debt Instruments: Tokens representing loans, bonds, or other debt obligations are securities, just as they would be in traditional finance.

Ongoing Issuer Obligations: If the issuer retains significant ongoing responsibilities—such as maintaining the network, developing the protocol, or controlling key infrastructure—the token remains a security regardless of its technical characteristics.

The key insight: issuer involvement and investor expectations determine SEC jurisdiction. If buyers reasonably expect profits from the issuer's efforts, you're dealing with a security.

Digital Commodities (CFTC)

Digital assets that do not meet the security criteria default to CFTC jurisdiction as commodities. The bill defines digital commodities as:

Decentralized Assets: Tokens where no single entity or coordinated group controls network operations, protocol development, or asset functionality.

Functional Tokens: Assets used primarily for network access, fee payment, or utility within decentralized applications—provided these functions don't create security-like expectations.

Sufficiently Decentralized Networks: The bill adopts a framework similar to former SEC Director William Hinman's 2018 analysis of Ethereum, recognizing that networks can transition from securities to commodities as they decentralize.

Bitcoin and Ether Carve-Out: The bill explicitly designates Bitcoin and Ether as commodities, ending years of regulatory ambiguity around the two largest crypto assets.

For CFTC-regulated commodities, the bill would authorize the agency to oversee spot market trading for the first time—not just derivatives. Exchanges offering CFTC-registered digital commodities could operate with clear federal oversight instead of navigating conflicting state money transmitter regimes.

The Three-Factor Test for DeFi

Recognizing that DeFi protocols operate differently from traditional companies, the CLARITY Act proposes a specialized framework for truly decentralized systems. A protocol may qualify for regulatory relief if it demonstrates:

1. No Unilateral Control Over User Assets

Can any individual or entity unilaterally freeze, seize, or transfer user assets? If yes, expect SEC scrutiny. True DeFi protocols must implement non-custodial architectures where users maintain exclusive control through private keys or multi-signature arrangements.

2. Immutable or Community-Governed Software

Can developers unilaterally modify protocol smart contracts? If the development team retains admin keys, upgrade authority, or pause functions, the protocol likely remains centralized enough to trigger SEC jurisdiction. Immutable contracts or time-locked, community-voted upgrades strengthen commodity classification.

3. Meaningful Decentralization

Is network control distributed across a sufficiently large and diverse validator set? The bill doesn't specify exact thresholds, but SEC-CFTC joint guidance is expected to provide safe harbors (e.g., minimum validator counts, geographic distribution requirements, absence of coordinated control).

Practical Application: A DeFi lending protocol with admin keys allowing developers to pause contracts, update interest rate models, or access user funds would likely trigger SEC jurisdiction despite claiming decentralization. A protocol with immutable contracts, multi-year governance time locks, and diverse validators might qualify for CFTC commodity treatment.

Decision Tree: Which Regulator Governs Your Token?

Use this framework for preliminary assessment:

Start Here: Did you raise funds by selling tokens?

• YES → Was there an expectation of profits from your team's efforts?
  • YES → SEC Security (likely)
  • NO → Continue analysis
• NO → Continue analysis

Does your token provide equity-like rights?

• Governance voting similar to shareholders? → SEC Security
• Profit-sharing or revenue claims? → SEC Security
• Neither? → Continue analysis

Do you or your team control critical infrastructure?

• Maintain validator nodes? → SEC Security (likely)
• Hold admin keys or upgrade authority? → SEC Security (likely)
• Control protocol treasury or fee distribution? → SEC Security (likely)
• None of the above? → Continue analysis

Is the network meaningfully decentralized?

• Diverse, independent validators? → CFTC Commodity (likely)
• Immutable or community-governed code? → CFTC Commodity (likely)
• No single point of control? → CFTC Commodity (likely)

Still uncertain? The bill mandates SEC-CFTC joint guidance within 180 days of enactment, including safe harbor criteria and no-action letter processes.

DeFi-Specific Carve-Outs

The CLARITY Act includes provisions recognizing that truly decentralized protocols don't fit traditional regulatory models:

Software Publisher Exemption: Developers who create and publish open-source protocol code without ongoing control, asset custody, or promotional activities may qualify for exemption from both SEC and CFTC registration requirements.

Transition Period: Protocols may receive up to 18 months to demonstrate progressive decentralization roadmaps, allowing teams to transition from centralized development to community governance without immediate enforcement risk.

No-Action Relief: The bill requires both agencies to establish streamlined no-action letter processes for novel DeFi structures, providing regulatory clarity within 60 days of application.

Important Limitation: These carve-outs apply only to genuinely decentralized protocols. "DeFi theater"—centralized projects claiming decentralization while retaining control—receives no protection and may face enhanced penalties for misrepresentation.

Registration Pathways

CFTC Registration for Spot Crypto Trading

For the first time, the CLARITY Act would authorize the CFTC to register and supervise spot market digital commodity exchanges. Registration requirements include:

• Custody Standards: Segregation of customer assets, qualified custodian requirements, insurance or bonding minimums
• Market Surveillance: Real-time monitoring for manipulation, wash trading, and layering
• Financial Reserves: Minimum capital requirements scaled to trading volume
• Cybersecurity: Audited security controls, incident response procedures, customer notification protocols
• Disclosure: Clear fee disclosures, conflict of interest policies, market maker arrangements

Registered exchanges would benefit from federal preemption of conflicting state money transmitter laws, dramatically reducing compliance costs.

SEC Registration for Token Securities

Digital asset securities remain subject to existing SEC frameworks, but the bill proposes modifications:

• Streamlined Registration: New Form D-Plus for token securities offerings, reducing disclosure burdens for qualifying issuers
• Trading Exemptions: Exempt secondary trading platforms for tokens with market caps below $50 million, subject to anti-fraud rules
• Custody Relief: Alternative custody arrangements for self-custodied digital securities
• Updated Accreditation: Revised accredited investor definitions accounting for crypto-native investors

The bill does not create blanket exemptions—if your token is a security, expect SEC oversight. But compliance pathways should become clearer and more accessible.

The SEC-CFTC Roundtable: What to Expect

The CLARITY Act mandates joint SEC-CFTC rulemaking on several critical issues:

Stablecoins: Jurisdiction over fiat-backed, algorithmic, and hybrid stablecoins remains contentious. Expect proposed frameworks distinguishing payment stablecoins (likely CFTC) from investment-return stablecoins (likely SEC).

Cross-Border Transactions: How U.S. jurisdiction applies to global DeFi protocols with no U.S. presence but U.S. users.

Transition Mechanics: Grace periods and compliance timelines for existing tokens to register or restructure.

Safe Harbors: Specific criteria for "sufficiently decentralized" determinations.

The agencies must publish proposed rules within 180 days of enactment, with 90-day public comment periods. Industry participation in rulemaking will be critical—this is your opportunity to influence implementation.

What Companies Should Do Now

While the CLARITY Act remains pending legislation, prudent crypto companies should take immediate action:

1. Conduct Jurisdictional Self-Assessment

Apply the frameworks above to your current token structure. Document your analysis with legal counsel. If you're clearly a security, begin SEC compliance planning. If you're arguably a commodity, prepare CFTC registration strategies.

2. Evaluate Decentralization Roadmaps

If centralized today, develop credible plans to transition control to token holders, eliminate admin keys, and distribute governance. Document timelines and technical milestones.

3. Review Marketing and Disclosures

Audit all promotional materials, whitepapers, and investor communications. Promises about team efforts building value trigger security classification. Shift messaging toward utility, community governance, and protocol mechanics.

4. Engage in the Legislative Process

Submit comment letters, participate in industry working groups, and coordinate with trade associations. The final legislation will reflect industry input—or lack thereof.

5. Prepare for Registration

Whether SEC or CFTC, registration requires significant lead time. Begin building compliance infrastructure: custody arrangements, surveillance systems, financial controls, legal documentation.

6. Monitor State-Level Developments

Even if federal law passes, state securities and money transmitter regimes may continue to apply. Track state legislation and enforcement patterns.

Looking Ahead

The CLARITY Act represents the most serious congressional effort yet to resolve crypto's jurisdictional nightmare. While passage is not guaranteed—and the bill will likely be amended significantly—the bipartisan support and industry consensus around market structure reform suggest momentum.

For crypto companies, the message is clear: regulatory clarity is coming, and it will require significant operational changes. The era of regulatory ambiguity as a business strategy is ending. Companies that proactively prepare for defined compliance frameworks will compete more effectively than those waiting for enforcement actions to force change.

The jurisdictional question that has paralyzed the industry for years may finally have an answer. What you do with that answer will determine whether your project thrives in the regulated crypto economy—or becomes a cautionary tale in the next wave of enforcement actions.

Need Regulatory Strategy Guidance?

Astraea Counsel helps crypto companies navigate SEC and CFTC compliance, including registration, disclosure obligations, and regulatory risk assessment. Explore our Regulatory Compliance services.

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