Crypto's CLARITY Act Faces DeFi Roadblock That Could Push Bill Past 2026

Washington's attempt to create America's first comprehensive crypto framework is hitting turbulence just as the finish line comes into view. Citi analysts say the CLARITY Act remains the "essential catalyst" for legitimizing digital assets, but negotiations over the bill's most contentious provisions are creating delays that could push final passage beyond 2026.

While the Senate Agriculture Committee has already advanced its version, the Banking Committee still controls the toughest issues, leaving timelines uncertain. Lawmakers plan to keep working even during a potential government shutdown, but the rising complexity of defining decentralized finance is proving harder to resolve than anticipated.

The DeFi Definition Dilemma

The biggest stumbling block isn't about taxes or trading fees—it's about defining decentralized finance itself. The core debate centers on determining exactly when decentralized protocols, software, and developers cross the line from neutral technology to regulated service providers.

This isn't just regulatory hairsplitting. An overly restrictive framework could cripple Web3 development, decentralized exchanges, derivatives, stablecoin yields, and layer-2 networks. But too much flexibility could leave investors vulnerable and traditional financial institutions crying foul about unfair competition.

Citi's analysts suggest any compromise will likely focus on custody and surveillance requirements rather than treating software as purely neutral. This approach attempts to thread the needle between innovation and oversight, but it also creates gray areas that could spawn years of legal battles.

The stakes are enormous. DeFi represents a fundamental reimagining of finance—removing intermediaries, automating transactions, and potentially reducing costs for everyone from small savers to multinational corporations. Getting the definition wrong could either stifle this transformation or leave it operating in a regulatory vacuum.

Stablecoin Rewards: Room for Compromise

While DeFi definitions create the biggest headaches, stablecoin rewards offer more hope for middle ground. Banks worry about regulatory arbitrage—the risk that crypto firms could offer higher yields by skirting traditional banking rules. Crypto companies counter that rewards are essential for user adoption and network growth.

Citi sees potential solutions emerging: time-limited yield programs, alternative incentive structures, or hybrid models that satisfy both camps. The bank notes this issue doesn't undermine the longer-term prospects for cross-border and business-to-business stablecoin use, suggesting the market has room for multiple approaches.

Tokenized Securities: Innovation Within Guardrails

Traditional market players have pushed back against tokenized equities, fearing they could bypass established market infrastructure. But potential workarounds are emerging: clearly classifying tokens as securities, keeping distribution within existing systems, using hybrid settlement models, or launching SEC pilot programs.

These approaches could support innovation without completely upending the securities value chain—a compromise that might satisfy both crypto innovators and Wall Street incumbents.

Market Reality Check

Even Coinbase's decision to withdraw support for the current bill won't derail the process, according to HSBC. While CEO Brian Armstrong says he'd prefer no bill over a bad one, analysts believe he'd likely accept a sensible compromise.

This pragmatic stance reflects a broader market reality: the crypto industry needs regulatory clarity more than perfect legislation. Years of enforcement-driven oversight have pushed companies offshore and left investors in limbo. A flawed but functional framework might be better than continued uncertainty.