Senators Plan a Clarity Act Vote on Sept. 15. What Happens Next for Crypto?

The latest attempt to pass comprehensive crypto legislation in the U.S. has stalled after the Senate broke for summer recess without voting on the Clarity Act, or Digital Asset Market Clarity Act. The legislation, which sets out a framework for handling digital assets in the U.S., cleared the House last summer, and many had been optimistic it would become law in the first half of this year.

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Lawmakers are now talking about pushing it through in September, but it still faces major hurdles. Here's what is likely to happen next and why it matters for crypto investors.

Why the Clarity Act matters

Cryptocurrency legislation has proven a slippery topic over the years. One of the big attractions of cryptocurrency is that it operates outside governments and banks, and regulation runs somewhat contrary to that ethos. At the same time, a lot of crypto's growth potential depends on mainstream adoption for which clear rules are crucial.

Stablecoin issuance soared after the Genius Act was passed last year, as it gave a solid framework for handling them. The Clarity Act could do the same for the broader crypto industry: It would set out what constitutes a security, which comes under the Securities and Exchange Commission's (SEC's) remit, and what is classified as a digital commodity, regulated by the Commodity Futures Trading Commission (CFTC). It could also lend legitimacy to the entire asset class and eliminate the risk of unexpected charges being brought against a popular crypto or crypto exchange for issuing or trading an unregistered security. Finally, it would remove some of the headaches for traditional institutions that must comply with strict rules.

I think passing the Clarity Act is fundamental for several potential crypto bull cases. For starters, I can't see Bitcoin (CRYPTO: BTC) acting as a true store of value or digital gold without regulatory certainty. Plus, the idea that stablecoins could transform the payment and banking industry, or that real-world asset (RWA) tokenization could merge the benefits of blockchain with traditional finance, is almost unthinkable without clearer regulatory rails.

What might happen next?

The Clarity Act is scheduled for its first Senate vote on Sept. 15, which will determine whether it progresses for further debate and a final vote. There's some pressure to pass it before the November midterms, which could change the Senate's makeup.

One sticking point is a disagreement between banks and the crypto industry on how stablecoin interest should work; if crypto platforms can pay stablecoin rewards, banks fear it will cut into their deposits. If crypto platforms offer bank-like services without having to follow the same rules as traditional financial institutions, banks argue that it wouldn't be a level playing field. Some compromise has been reached, but the issue hasn't gone away.

Another is the ethics provisions that have dogged this legislation throughout. Opponents want to see enforceable conflict-of-interest language that would essentially prevent elected officials, including the president, from using their positions to profit from cryptocurrency ventures. Some of that text is there, but it may not be enough.

If the Clarity Act fails, the SEC and CFTC stand ready to issue rules that would give the industry a more solid foundation. However, that is not a substitute for full legislation. When Paul Atkins took over as SEC Chair, the organization did a U-turn on digital assets, dropping enforcement actions and adopting a more pro-crypto stance.

Crypto needs solid ground, not rules that could change with each administration.

Emma Newbery has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.