Written by: Spinach Spinach

On the morning of May 14, 2026, the Senate Banking Committee was marking up a 309-page text—the Senate substitute amendment for the CLARITY Act. This is the most crucial step taken in ten months since the bill passed the House last July by a vote of 294 to 134. However, if you strip away all the legal shells, the one thing this text is actually doing is:

Recognizing that crypto assets meet the definition of "securities" and then establishing a separate set of rules that do not fall under securities law.

This sounds paradoxical. But it is precisely the spirit of this bill—a refusal to overturn Howey, to rewrite securities law, or to eliminate bank deposit protections, while carving out new categories alongside these existing rules. The entire text is a threefold repetition of this "carving" technique. Strictly speaking, this is no longer "that" CLARITY Act. The version that passed the House last July did not include the category of "ancillary asset," lacked a provision prohibiting interest on stablecoins, and did not nearly claw back SEC jurisdiction from the CFTC as much as this version does. The Senate alternative is the result of Tim Scott and Cynthia Lummis substantially rewriting it over the past ten months.

To understand the new CLARITY substitute version, Spinach has sorted out three underlying logics behind it.

Understanding these three will help you comprehend the entire chessboard of U.S. crypto regulation over the next two years.

1. Not overturning Howey, but carving a hole alongside it

For the past decade, the biggest problem for U.S. crypto regulation has been the Howey test from 1946—"the reasonable expectation of profit derived from the efforts of others." This test has been an unassailable cornerstone in case law but has paradoxically boxed nearly all tokens into the category of securities.

The SEC's lawsuits against Ripple, Coinbase, and Binance stem from this.

The CLARITY substitute does not attempt to overturn Howey. It does something else:

It creates a brand new legal category called ancillary asset.

Simplifying, a token, if its value relies on the "entrepreneurial or managerial efforts" of the issuer or core team, is an ancillary asset.

Pay attention to this definition—it acknowledges the existence of the "reliance on the efforts of others" relationship mentioned in Howey.

Acknowledged! Then, the bill establishes a separate rule for such things: - The act of issuance itself is legally recognized as "involving securities," but once the token is issued, it is no longer a security. It is an ancillary asset, governed by disclosure rules rather than registration rules. It's like a legal guardian saying: "I acknowledge this child is yours, but from the very first second they were born, they are no longer your responsibility." Is this a bit absurd? Yes. But this is American legislative standard operating procedure to resolve the "want both" dilemma: not to overturn the cornerstone of case law (which it can't and doesn't need to), but to circumvent it with a new statutory category.

Thus, when people say CLARITY makes tokens "no longer securities"—that is a lazy summary. The accurate statement is: CLARITY creates a middle layer of "disclosure obligation density lower than securities but higher than commodities," specifically designed to house items that are neither stocks nor corn. The downstream implications of this logic are structural. Legal paths for project teams distributing tokens within the U.S. will become clearer, no longer needing to go around in circles through SAFT, Reg D, and Reg S.

More importantly—America is finally about to give tokens a legal identity. No longer will it be a Schrodinger's state of "if the SEC sues you today, it's a security, but if you settle tomorrow, it's not." An interesting detail to note: There is a very precisely worded clause in the bill—a token will not be regarded as an ancillary asset if it is the principal asset of an ETF listed on a national securities exchange in the U.S. as of January 1, 2026. Allow me to pause to laugh. BTC and ETH spot ETFs are set to be approved in January and July 2024 respectively, and by early 2026, they will have been running steadily.

This clause essentially "ratifies" at the legislative level that neither of you is a security, nor even an ancillary asset. The legal status is the cleanest. It doesn’t name names but hits precisely. It’s an extremely American solution.

2. The compliance dividing line for DeFi: code is code, operators are operators

This is the most lethal logic of the entire bill for practitioners—and also the one most often misinterpreted. On the surface, it differentiates "true DeFi" from "false DeFi," but the underlying distinction is another set—between the protocol itself and the operators of the protocol.

- Code, nodes, wallets, and pure algorithmic logic belong to the former and are not subject to securities law;

- The individuals who control, modify, or review the protocol belong to the latter and are subject to jurisdiction.

This sounds simple but has not existed in the past decade. The SEC's arguments in the cases against Coinbase, Binance, and Uniswap have always been "a protocol is a product, and the product is an extension of the issuer"—under such logic, there is no distinction between "protocol" and "operators." The CLARITY substitute version is the first time this line has been drawn at the legislative level. How exactly is it drawn? Two directions.

The first direction, towards "false DeFi"—drawing a warning line for operators.

The bill provides a textbook definition of DeFi protocols: participants execute financial transactions based on predetermined, non-discretionary algorithms, and no one except the users themselves holds or controls the assets.

Then it defines what constitutes "false DeFi"—meeting any of the following is sufficient:

- There exists some person or group that can control or significantly change the protocol's functionality, operation, or consensus rules;

- The protocol does not operate solely based on pre-established and transparent rules in the source code;

- There exists someone or a group that can review, restrict, or prohibit the use of the protocol through protocol operations.

Once you are identified as "false DeFi," and your activities fall within the category of securities, you must register, disclose, and be regulated under the 1934 Act and are subject to anti-money laundering obligations. Please ask yourself: does the so-called DAO-governed DEX you manage have the admin key in a multisig? Do most multisig members come from the core team? Are protocol parameter upgrades proposals by the core team that can be passed by core team voting? Is the frontend managed by the core team?

If any of the above answers is "yes," by the standards of this bill, you probably belong to "false DeFi."

The bill leaves a very clever safe harbor—an emergency safety committee exception. You can retain an emergency pause mechanism to protect users from hacking, as long as that power is publicly disclosed in advance, regulated, used only to respond to specific cybersecurity incidents, with strictly limited scope and duration, and no single individual has unilateral control. But you cannot use this pause to upgrade the protocol, change economic parameters, or make governance decisions. This provision is exceptionally well-crafted, almost tailor-made for protocols like Compound, Aave, and Uniswap that have security councils.

The second direction, towards "the protocol itself"—drawing a protective circle around the code.

The bill exempts several things that have kept developers on edge over the past years all at once:

- Compiling, relaying, and verifying network transactions; operating nodes or oracles;

- Developing distributed ledger systems;

- Developing wallet software for users to manage their own private keys.

Just based on these actions alone, they do not fall under securities law jurisdiction. Those who have experienced the 2018 Tornado Cash incident, 2022 sanctions code, and the 2023 lawsuits against Samourai Wallet developers should feel the weight of this provision. It directly converts the idea that "writing code is free speech," long advocated by the legal community but denied by the DOJ, into legislative text.

But pay attention to the details: the bill retains SEC's enforcement power against fraud and manipulation. In other words—writing code is no longer a crime, but using code to deceive still is. These two directions combine to form the complete second logic:

- The protocol itself is protected by law, but the operators of the protocol are regulated according to their actual control levels.

- Truly decentralized protocols gain a decent legal status, while "semi-DeFi" will be assimilated.

Numerous platforms claiming to be decentralized, but still holding the admin key in the team's hands, such as decentralized exchanges, lending protocols, and derivatives platforms, will have to make painful choices over the next two years—either truly decentralizing power or registering as broker-dealers or exchanges. The highest capital and compliance costs will be in this gray area.

3. Stablecoins cannot behave like banks, but DeFi can—a carefully maintained narrow boundary

If there is one of the most dramatic chapters in the entire bill, it’s the prohibition on stablecoin interest.

In a nutshell: it prohibits digital asset service providers from paying interest or returns on stablecoins to U.S. users.

However— the devil is in the list of "allowed returns."

Allowed returns that do not constitute "functional equivalents of bank interest" include:

- Commission incentives related to transaction payment settlement;

- Returns obtained from providing liquidity, collateral, or otherwise placing assets at credit or investment risk;

- Participation in governance, validation, staking, loyalty programs, etc.

Moreover—these returns can be calculated based on balance, duration, or tenure.

When I read "placing assets at credit or investment risk," I laughed out loud.

What is this? This is the compliance channel designed specifically for the entire DeFi lending market.

“Earning returns by depositing USDC into protocols like Morpho, Aave, or Compound is allowed, as long as these returns come from the credit or investment risk exposure of the assets and not the balance interest of the stablecoins themselves." The banking industry of course saw through this point. On May 9, the three major U.S. banking associations (ICBA, BPI, ABA) jointly sent a letter rejecting this compromise, pointing out that this is a "loophole." On May 11, on Mother's Day, Rob Nichols, CEO of the American Bankers Association, sent a letter to all U.S. bank CEOs, demanding “immediate action” to lobby senators.

Their core argument is very straightforward: about 80% of loan funding in U.S. banks comes from customer deposits; if stablecoins can provide users an incentive through "activity-based rewards" to keep their money in USDC wallets instead of checking accounts, then banks lose a cheap source of funding. Translated, Tillis’s response is: "A loophole is still a loophole; let’s agree to disagree."

The logic behind this game is the most important aspect to understand. Washington is making a bet—in leaving a narrow, legally maintained boundary between stablecoins and bank deposits: stablecoins cannot directly pay interest like banks (protecting the deposit base), but stablecoins can serve as an entry point for accessing DeFi yields (allowing capital market pricing). It pretends to protect banks, but actually opens a more flexible product space for the crypto industry than banks. The most worthwhile interpretation of this provision is that the law draws a line between "deposits" and "credit risk exposure," which happens to fall on the boundary of DeFi lending protocols.

The legitimacy of the USDC lending market is further solidified—not because stablecoins pay interest, but because users place stablecoins in a vehicle that is "assets at credit or investment risk." The downstream implications of this logic: compliant issuers like Circle and Paxos cannot directly pay interest, but users can earn returns by placing stablecoins in DeFi protocols, on-chain lending markets, or tokenized money market funds as these "credit risk exposure" vehicles.

The legal basis for real-world asset (RWA) lending markets and on-chain credit markets has been further established.

Three underlying logics share the same legislative philosophy

When viewing the three underlying logics together, one can discover a hidden common structure—each one follows the principle of "the law does not overturn X but carves a new channel beside X":

The first one, not overturning Howey but carving out ancillary asset.

The second one, not overturning intermediary regulation, but carving out the distinction between "protocol vs operators."

The third one, not overturning bank deposit protection, but carving out the "credit risk exposure" channel.

Together, these three embody the spirit of this bill: it is not about overturning existing rules but about carving new categories within the seams of existing rules. The cornerstone of case law remains untouched, securities law is not abolished, and bank deposit protections are not cancelled, yet crypto assets, DeFi protocols, stablecoin activities, and on-chain lending yields are all specially and separately incorporated into law with a new logic. This is a very American legislative philosophy—disliking revolutions but excelling at patching new elements onto old frameworks; after applying enough patches, the world becomes different.

We must also recognize the costs

At this point, portraying this bill too glamorously would seem disingenuous. Each of the three logics has its downsides that professional practitioners should be acutely aware of: The cost of the first logic is that the specifics of the disclosure obligations for ancillary assets will ultimately be determined by the SEC through rulemaking. If the disclosure forms are overly burdensome—for example, requiring project teams to update token economic models quarterly, disclose all holders with over 4% stakes, and provide ongoing "entrepreneurial progress" reports—then the actual cost of these obligations may approach that of full securities registration. The law has given you a new channel, but how wide that channel is depends on how the regulatory agencies interpret it.

The cost of the second logic is that the "true DeFi" test is very stringent, but the execution power lies with the SEC.

"Functions to control or significantly alter the protocol" and "reviewing, restricting, or prohibiting the use of the protocol"—the boundaries of these terms will need to be defined by the SEC through cases and rules. The next SEC chair, if unfriendly towards DeFi, can interpret these standards very narrowly. The legislation provides a safe harbor, but who gets to define its boundaries remains an open question. The cost of the third logic is the most straightforward—how widely the "credit risk exposure" channel is opened could lead to a new round of Celsius/BlockFi-style gray yield products.

The line between legally sanctioned "activity-based rewards" and essentially "interest" is clear in the text but may easily blur in product design. Regulatory agencies are destined to encounter a batch of products walking this border—they appear to be "placing assets at credit or investment risk," but the user experience is not much different from time deposits.

This game has just begun.

The real battleground in the next stage is not Congress but the regulatory agencies. The phrase "the Commission shall adopt rules... not later than 1 year" appears dozens of times in the bill. Who becomes the SEC chair, who becomes the CFTC chair, and how they respond to industry opinions during the notice-and-comment phase will determine the ultimate texture of these provisions. What is seen today is the skeleton; the muscle will not grow in for another 12 to 18 months.

Conclusion

Returning to the markup from this morning. Even if it passes through the committee smoothly, this bill has to complete the full Senate vote, merge with the agriculture committee version, coordinate with the House version, then return to both chambers for votes, and finally be sent for the President's signature—any step can change the form of the text. Polymarket has recently given the probability of "CLARITY being signed into law in 2026" a fluctuation in the 60-70% range. But even if the final legal text differs from the draft today, this 309-page text has already accomplished its most significant task:

It has transformed the language system of the national crypto policy debate from "Is this a security?" to "At what level should it be disclosed, who regulates it, and what standards should be compliant?" A decade ago, regulation relied on "regulation by enforcement," five years ago it relied on "regulation by ambiguity," and now it is finally moving towards "regulation by statute."

What practitioners should focus on most is not any specific exemption but the fact that the language of the game has changed. As for where this game will ultimately lead, no one can give an answer right now—this is precisely what makes it truly interesting.

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