Better than CLARITY: The Case for a Function-Based Crypto Regulatory Framework

In an attempt to provide regulatory authority within the digital asset market, the U.S. House of Representatives passed the CLARITY Act. Under the Act, a blockchain first falls under the jurisdiction of the Securities and Exchange Commission and then transitions to the jurisdiction of the Commodity Futures Trading Commission as the blockchain “matures.” While the Act attempts to bring clarity to regulation within the digital asset industry, it falls short. Because of the Act’s transitional form, gaps are left for issuers to distort definitions and manipulate timelines to secure the oversight they want. This Article discusses the Act’s shortcomings and argues that a function-based approach to regulating crypto would provide greater consistency and increased investor protection. By examining the Act’s limitations, it is clear that a function-based approach would create a functional division between the SEC and the CFTC and promote market stability. Thus, Congress should adopt a function-based regulatory framework to provide clarity and consistency within the digital asset market.