Law Enforcement Groups Warn CLARITY Act Section 604 Could Create AML Gaps
A coalition of US law enforcement organizations has warned that part of the Digital Asset Market Clarity Act (CLARITY Act) could create blind spots in combating illicit finance involving crypto infrastructure.
The concern centers on Section 604, which provides protections for non-custodial wallet developers and infrastructure providers. Supporters argue that writing code or building non-custodial tools should not automatically hold developers liable for third-party misuse. However, law enforcement groups worry that overly broad language could hinder investigations and prosecutions of bad actors, including sanctioned entities, scammers, ransomware groups, and money launderers.
The debate reflects a long-standing tension in crypto policy: non-custodial tools are essential to the industry’s open architecture but can also be exploited. The challenge is to target illicit use without criminalizing neutral technology.
The CLARITY Act is a major market-structure effort in Washington. If it advances with strong developer protections, it could boost confidence for DeFi builders and wallet developers. If protections are narrowed, compliance expectations may increase for infrastructure projects that do not hold customer assets.
For the crypto industry, the issue is central because wallet privacy, self-custody, and open-source development are core to crypto. Simultaneously, enforcement agencies face pressure to prevent crypto from becoming a safe haven for illicit finance.
A workable compromise would likely need to distinguish between passive software publication, active facilitation, custodial control, and deliberate evasion. Without nuance, the law risks chilling development or leaving room for abuse.
The market impact may not be immediate, but policy direction could shape where developers build, how DeFi interfaces operate, and how US regulators treat non-custodial tools.
The industry argues that non-custodial developers are not financial intermediaries—they do not control user funds, cannot reverse transactions, and may not operate the interfaces. Law enforcement counters that bad actors exploit these gaps. The legislative challenge is to give investigators tools without turning developers into gatekeepers for decentralized systems.
This coverage is based on law enforcement coalition letters and reporting.