Removal of CLARITY Act’s Section 604 Could Spark First Amendment Battle, Industry Executives Warn

Key Takeaways

Political Headwinds and the Legislative Calendar

In a statement marking the first anniversary of the House’s bipartisan passage of the Digital Asset Market Clarity (CLARITY) Act, committee leaders reiterated their warning that the current “regulation by enforcement” paradigm is stifling American innovation. Lawmakers emphasized that a persistent lack of regulatory stability has already forced digital asset firms offshore, making the legislative framework vital to maintaining the United States’ position at the center of the global digital economy.

The anniversary arrives as the bill remains in limbo, stalled in the Senate since last year. Despite mounting industry pressure, the legislation faces headwinds from financial institutions and political opposition.

Recent allegations concerning Donald Trump’s personal cryptocurrency earnings have further complicated the bill’s trajectory, as opponents attempt to leverage the controversy to derail its momentum. Nevertheless, proponents remain optimistic that a Senate vote could still occur before the August recess—a milestone that would represent a major step toward a defined federal framework for the digital asset industry.

While partisan gridlock poses the most immediate threat, industry insiders also fear that an eventual bipartisan compromise might dilute or entirely strip Section 604 to appease law enforcement concerns. The provision is central to the bill’s core objective: shielding noncustodial blockchain developers, node operators, and validators from being classified as federal money transmitters.

Prominent advocacy groups, including Coin Center and the Blockchain Association, have labeled Section 604 nonnegotiable for safeguarding open-source innovation. Web3 founders and executives echoed this sentiment to Bitcoin.com News, warning that omitting this explicit legal protection would drive developers out of the U.S. domestic market.

“Developers need absolute confidence that publishing open-source code will not expose them to the same liabilities as operating a financial intermediary,” said Ivo Grigorov, CEO of Real Finance. “If that distinction becomes blurred, innovation will naturally migrate to jurisdictions offering greater legal certainty.”

First Amendment Implications for Open-Source Code

Stefan Muehlbauer, head of U.S. government affairs at CertiK, noted that stripping Section 604 effectively conflates software development with financial services, potentially subjecting developers to the Bank Secrecy Act. Treating code writing as money transmission, Muehlbauer argued, invites a direct constitutional challenge. Decades of federal jurisprudence, backed by the U.S. Supreme Court, have established that computer source code is protected free speech under the First Amendment.

“Ultimately, this won’t stop smart contracts from being written,” Muehlbauer said. “However, it ensures developers are pushed offshore, leaving American consumers with fewer protections against bad actors.”

Meanwhile, Iana Dimitrova, CEO of Openpayd, acknowledged that while debates over yield and deposit migration persist, they should not obscure the macroeconomic reality. The expanding use of stablecoins for cross-border value transfer, she argued, only strengthens the case for immediate federal framework oversight. As adoption accelerates, Dimitrova noted, the “focus should be on building the infrastructure that allows traditional finance and digital assets to work seamlessly together.”

The CLARITY Act also addresses accounting standards, though it stops short of amending or overriding the controversial Staff Accounting Bulletin No. 121 (SAB 121). Instead, the bill acknowledges SAB 121’s prior rescission and prohibits the Securities and Exchange Commission from reimposing equivalent crypto-custody accounting requirements without undergoing a comprehensive notice-and-comment rulemaking process.

While this restriction removes a primary hurdle for institutional adoption, Muehlbauer cautioned that it does not entirely clear the runway for traditional bank custody.

“The ultimate gatekeepers remain the prudential regulators—namely the Fed, OCC, and FDIC,” Muehlbauer said. “Their stringent Basel III capital frameworks, leverage ratios, and risk-weightings for digital assets still make direct crypto custody an operationally intensive business that most traditional banks will avoid.”

Grigorov took a more optimistic view of life after SAB 121, suggesting that while capital requirements and operational risks persist, “those are solvable business challenges rather than existential ones.” He added that the structural clarity provided by the bill establishes the baseline conditions necessary for institutional liquidity to flow on-chain.

“Once that happens, the industry’s focus shifts from simply attracting capital to creating transparent, high-quality investment opportunities that can put that liquidity to work in the real economy,” Grigorov said.

The Bitcoin Exception: Unaddressed Tax Challenges

While a consensus exists that the CLARITY Act is a step forward, some pro- Bitcoin market participants argue the framework is overly tailored toward utility token issuers and “decentralization maturity” metrics. Mark Zalan, CEO of Gomining, pointed out that these rules have less utility for bitcoin, which regulators have long accepted as a commodity.

“For Bitcoin, which still commands more than half the crypto ecosystem, the largest regulatory gaps remain unaddressed,” Zalan explained. “Chief among them is tax treatment. Because Bitcoin is treated as property, every single transaction triggers a taxable event, making it impractical for daily commerce by consumers and merchants alike.”

Instead, Zalan concluded, a targeted de minimis tax exemption for small transactions—paired with clear, explicit protections for self-custody, mining, and noncustodial infrastructure—would do far more to unlock Bitcoin’s economic utility than sweeping market-structure rules alone.