U.S. Democratic sweep could be the final nail in the ‘Clarity Act’s coffin’

The crypto industry’s hope of getting a long-awaited regulatory framework through U.S. Congress suffered yet another blow Tuesday as Democrats won control of both chambers in the U.S. midterm elections.

"For crypto, the Democratic sweep may well be the final nail in the Clarity Act's coffin," Mati Greenspan, a crypto market analyst, a market expert, bitcoin maximalist and founder at Quantum Economics, told CoinDesk, adding that in his opinion it’s a sad day for crypto.

"The bill couldn't even clear a procedural vote in September, when Republicans controlled both chambers,” Greenspan said. “Now the industry faces the prospect of starting from scratch in a divided Washington."

Greenspan is not alone.

"The Clarity Act is likely dead in the water in its current form," said Stefan Muehlbauer, head of U.S. government affairs at blockchain security firm CertiK.

The industry spent heavily on the elections, hoping to secure legislation setting out how cryptocurrencies and the companies handling them would be regulated. Crypto political action groups (PACs) spent roughly $170.5 million, according to figures Anton Golub shared with CoinDesk.

The head of exchange go-to-market at Forte and a former crypto exchange executive said Republicans were at the receiving end of at least $125.5 million of that crypto-lobbying spend.

Despite control of Congress and a crypto-friendly president, Donald Trump, the Clarity Act failed to advance in September. With Democrats now taking back both chambers, the industry’s chances of passing the bill in its current form have narrowed further, Golub said.

The Forte founder said he agrees the bill is in serious trouble, although he credits Trump with changing how regulators treat the industry today.

"Trump created a friendlier environment for crypto companies, but his family's involvement also gave Democrats a reason to oppose crypto-friendly legislation," Golub said.

One obstacle has been the fight between banks and crypto firms over stablecoin rewards. Banks oppose allowing exchanges to pay customers rewards on dollar-backed tokens, fearing that deposits could leave traditional bank accounts.

Golub said Republicans failed to settle that dispute when they controlled Congress. He believes the bill’s chances of passing its previous form have collapsed.

But he doesn’t expect the election to stop crypto trading products from expanding. Golub pointed to Tuesday’s decision by the Commodity Futures Trading Commission (CFTC) to allow a single stock perpetual futures on qualifying U.S. exchanges, though a federal judge indicated Tuesday that these products might not be allowable under the CFTC.

Perpetual futures let traders bet on the price of assets without owning them or having to close their positions on a fixed date. Trading in these contracts has grown as crypto exchanges expand into stocks, commodities and other traditional assets.

"I expect perpetual futures to become a much bigger part of US derivatives trading, beyond crypto into equities and other markets," Golub said.

Muehlbauer expects Democrats to increase scrutiny into crypto firms and Trump’s cryptocurrency dealins through congressional hearings and investigations, particularly over money laundering, cybersecurity and consumer protection.

Brent Fulfer, co-founder of venture capital firm TBV, offered a different view.

"Clarity already died in September with Republicans running the Senate," Fulfer said. He noted that more than 70 House Democrats had supported the bill and argued that legislation with bipartisan support and safeguards against conflicts of interest could last longer.

Jason Fernandes, a longtime crypto entrepreneur and founder of AdLunam, stroke a more conciliatory tone, saying he sees an opportunity for the industry to work with Democrats rather than fight them.

"Some regulation and enforcement against bad actors, while it can get scary for even good industry folks, overall it makes the pie much bigger," Fernandes said.

He said crypto companies should support Democratic efforts to clean up the market, provided lawmakers take a measured approach instead of punishing the entire industry for the actions of just a few.

But others are not so optimistic. Shady El Damaty, co-founder of Human.tech, believes Democrats will likely take the opportunity to investigate Trump’s crypto interest, political donations and prediction markets, which they have been promising to do and widely reported by CoinDesk,including in this in-depth article.

El Damaty singled out Robinhood, which has pushed into tokenized stocks, predicting greater scrutiny of its offerings. His warning comes as Amazon, Tesla, SpaceX and other major companies have objected to a separate plan by OKX and New York Stock Exchange parent Intercontinental Exchange to trade tokenized versions of their shares. Those objections do not directly concern Robinhood.

"Oh, and Robinhood is likely toast," El Damaty said. "I love them, but they will likely come under intense scrutiny for their stock token offerings and aggressive crypto strategy."