Bitcoin (BTC) and the broader cryptocurrency market rallied after the CLARITY Act failed to secure the 60 votes needed to advance in the Senate. The rally puzzled many, who wondered why the markets reacted the way they did after a bill they negotiated for three years stalled yet again.
Bitwise CIO Matt Hougan explained the contradiction in a memo, stating that the stall left stablecoin rewards intact and allowed federal regulators to announce several measures he believes are more favorable than the bill itself.
Why Did Crypto Rally After the Clarity Act Failed to Advance
The CLARITY Act failed to advance in the United States Senate, falling 11 votes short of the 60 required. 49 senators voted in favor of the act, 50 voted against, and 1 senator did not vote. After three years of negotiations with various stakeholders, it would be a fair assumption that the cryptocurrency market could see a substantial downturn. However, the marketโs response left many searching for answers. Instead of an expected decline, BTC and the broader cryptocurrency market rallied. Houganโs memo noted that BTC is up 8% since the vote, Ethereum (ETH) 7%, while tokens like NEAR have recorded a triple-digit jump since the vote. So why has the market rallied after a bill it fought so hard to advance failed?
Hougan believes several underlying factors dictated the price action, and that the status quo leaves the market better off. The Bitwise CIO explained that the crypto industry backed the bill because it promised regulatory clarity and certainty. However, it was not entirely comfortable with the long list of compromises ceded during protracted negotiationsโcompromises that could have stalled innovation in the industry. Additionally, intervention by the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) has also benefited the industry, thanks to several pro-crypto actions.
Stablecoin Rewards Untouched
Houganโs memo highlighted that the CLARITY Actโs failure left stablecoin rewards untouched. Stablecoin rewards were one of the sore points during negotiations between the crypto and banking industries. The banking industry argued that stablecoin rewards could drain capital from traditional savings accounts, impacting liquidity and lending. Banks ultimately got the upper hand during negotiations, with the final version of the bill preventing crypto exchanges from paying interest or yield to customers. It also introduced a heavy fine of up to $5 million per violation.
Hougan stated that with the CLARITY Act failing to advance, the GENIUS Act remains in effect. The GENIUS Act bars issuers from paying interest, but leaves third-party platforms like cryptocurrency exchanges in a grey area. This means cryptocurrency exchanges could reward users based on their stablecoin balance.
Less Competition for Cryptocurrency Exchanges
Hougan explained that the CLARITY Act would have created a national license, opening the space for would-be rivals. Under the current structure, crypto exchanges must obtain licenses from individual states. A national license would allow competition from traditional financial players, potentially squeezing existing cryptocurrency exchanges. Hougan also highlighted that the CLARITY Act would have limited crypto firms from combining exchange and broker services, raising costs.
Big Win for Tokenization Platforms
The CLARITY Act could have delayed tokenized stocks by years. Hougan explained that the act directed the SEC to explore how tokenized securities should be treated. After the bill failed to pass, the SEC granted an โinnovation exemptionโ allowing tokenized US stocks to trade using permissioned automated market makers and liquidity pools. It also exempted the venues and liquidity providers from registering as โexchanges and dealers,โ moving them out of the purview of rules governing traditional stock exchanges like the NYSE and Nasdaq. However, the order only covers listed US stocks, caps volume for venues, and is valid only for five years.
Clearer Rules for Revenue-Generating Tokens
You may have noted the NEAR tokenโs staggering 104% increase since the CLARITY Act vote. Other tokens, such as Uniswap (UNI) have risen 49%. Hougan explained that these tokens have surged partly because the CLARITY Act would have muddled rules governing them. SEC staff issued further guidance after the bill stalled, clarifying that a buyback program in an already functioning network would not make its token a security.
Lingering Risks
Hougan called the CLARITY Actโs failure to advance a โblessing in disguise,โ adding that its language left several legal questions open to interpretation. The Senate vote allowed the SEC to step in and clarify existing guidance, allowing the industry to move forward with greater clarity. However, Hougan warned that a new administration could undo the work by installing a new SEC and CFTC. The Bitwise CIO ended on a positive note, stating:
โCrypto sacrificed long-term certainty and got better rules, faster.โ
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
