3 Important Things Crypto Investors Need to Know About the Senate Banking Committee's Clarity Act

Last July, the U.S. House of Representatives passed the Digital Asset Market Clarity Act, which aims to establish a comprehensive regulatory framework for all digital assets. The Senate hasn't passed the bill yet, and the Senate Banking Committee is currently reviewing it.

After several months of bipartisan negotiations, the Senate Banking Committee recently drafted clearer amendments for the bill. It's still unclear when (or if) it will be passed into law, but crypto investors should be aware of the Clarity Act's three most significant potential changes.

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1. Commodities vs. securities

The Clarity Act will determine which cryptocurrencies are commodities and which are securities. The crypto-friendly Commodity Futures Trading Commission (CFTC) would gain exclusive jurisdiction over commodities. The Securities and Exchange Commission (SEC), which frequently clashed with crypto firms, will regulate those products that are classified as securities.

For now, those lines are blurry. Bitcoin (CRYPTO: BTC) and Ether (CRYPTO: ETH) are generally considered commodities, while smaller tokens like XRP (CRYPTO: XRP) are classified as securities. Setting more precise boundaries could make those coins easier to regulate, attract more conservative investors, and support the creation of more ETFs.

2. Stablecoin yields could be banned

Stablecoins, which track the value of the U.S. dollar, have gained momentum over the past decade because they can be held without a bank account, used for quick overseas transfers, and staked (locked up on a blockchain) to earn interest-like rewards.

However, the Clarity Act could ban investors from staking their stablecoins on centralized or decentralized finance platforms to earn those rewards. The Senate Banking Committee argues those investments -- which often pay higher yields than conventional CDs or savings accounts -- aren't guaranteed and carry hidden risks. Banks overwhelmingly support those restrictions, but Coinbase (NASDAQ: COIN) and other crypto exchanges oppose them.

3. Safeguards for investors

Lastly, the Senate Banking Committee wants to create more safeguards for crypto investors by granting the CFTC and SEC more powers to prosecute fraud while introducing tighter custody, transparency, and reporting requirements for crypto firms and exchanges. Those agencies could also ban crypto firms from using misleading promotions.

These measures could make the crypto market safer and more predictable for retail investors. They could also flush out weaker crypto assets that lack sufficient reserves or use high-yield, leveraged products to attract uninformed investors.

All of these proposed changes, along with the recent tax changes for cryptocurrencies, suggest these digital assets will be more tightly regulated like stocks. That should stabilize the market over the long term, but it could also undermine the appeal of cryptocurrencies as decentralized investments immune to government regulation.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Ethereum, and XRP. The Motley Fool recommends Coinbase Global. The Motley Fool has a disclosure policy.