Law Enforcement and Catholic Groups Warn CLARITY Act Could Create Oversight Gaps in Crypto Crime Fighting

Background on the CLARITY Act

The Digital Asset Market Clarity Act, commonly referred to as the CLARITY Act, represents a significant attempt to establish a regulatory framework for digital assets in the United States. The bill has advanced through the House and cleared the Senate Banking Committee, with a House hearing scheduled for July 17. A key element under scrutiny is Section 604, which incorporates the Blockchain Regulatory Certainty Act.

This section aims to clarify the regulatory status of certain participants in the digital asset ecosystem, particularly non-custodial software developers, open-source contributors, self-custody tools, and specific DeFi infrastructure. It seeks to prevent automatic classification of these entities as money transmitters under federal law when they do not control or custody user assets.

Law Enforcement Concerns

Four major law enforcement organizations—the National District Attorneys Association, the National Association of Assistant United States Attorneys, the International Association of Chiefs of Police, and the National Sheriffs’ Association—sent a letter to Acting Attorney General Todd Blanche and White House digital assets adviser Patrick Witt. These groups represent tens of thousands of prosecutors, police chiefs, sheriffs, and investigators.

The letter emphasized that regulatory certainty should not come at the expense of accountability, transparency, victim protection, or public safety. The groups clarified their concern was not with individuals writing or publishing software code, but with exemptions that could hinder enforcement efforts.

Catholic Leaders and Anti-Trafficking Advocates Join Opposition

A coalition of nearly 100 Catholic leaders and organizations, including the Alliance to End Human Trafficking founded by U.S. Catholic Sisters, sent a separate letter to Senate Majority Leader John Thune and Senate Democratic Leader Chuck Schumer. They expressed worries that the provisions could complicate efforts to monitor and disrupt financial flows linked to human trafficking, organized crime, child exploitation, and sanctions evasion.

The advocates argued that broad carveouts and regulatory ambiguities in Section 604 might make it more difficult to track illicit activity tied to serious abuses. This perspective frames the issue through the lens of human dignity and victim protection rather than purely technical regulatory design.

Industry and Proponent Responses

Supporters of the provision, including representatives from the Blockchain Association, maintain that Section 604 performs a narrow function. It prevents non-custodial software developers from being misclassified as money transmitters when they do not custody assets or control transactions. They assert that the language does not immunize criminals or limit sanctions enforcement, fraud prosecutions, or money laundering cases.

Senator Cynthia Lummis, a key proponent, has stated that the CLARITY Act addresses regulatory ambiguity that hurts builders and helps criminals, emphasizing that writing code is not money transmission.

Broader Context and Next Steps

The CLARITY Act seeks to divide oversight responsibilities between the SEC and CFTC for different aspects of the digital asset market. While it has support from parts of the crypto industry for providing clarity to innovators, the recent letters highlight ongoing tensions between innovation goals and enforcement needs.

Critics from banking and transparency groups have echoed some of these concerns about potential gaps in illicit finance controls. The bill's path forward in the Senate requires addressing these issues amid a 60-vote threshold for advancement. The upcoming July 17 hearing is expected to examine these balances closely.