Removal of CLARITY Act’s Section 604 Could Spark First Amendment Battle, Industry Executives Warn
One year after the U.S. House passed the CLARITY Act to replace “regulation by enforcement” with clear rules, the bill remains stalled in the Senate due to banking opposition and partisan friction. Industry groups warn that stripping Section 604 will trigger First Amendment legal challenges and drive open-source developers out of the U.S.
In a statement marking the first anniversary of the House’s bipartisan passage of the Digital Asset Market Clarity (CLARITY) Act, committee leaders reiterated that the current “regulation by enforcement” paradigm is stifling American innovation. The legislation faces headwinds from financial institutions and political opposition, and recent allegations concerning Donald Trump’s personal cryptocurrency earnings have further complicated its trajectory.
Proponents remain optimistic that a Senate vote could still occur before the August recess. However, industry insiders fear that a bipartisan compromise might dilute or entirely strip Section 604 to appease law enforcement concerns. Section 604 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, 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.”
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 invites a direct constitutional challenge, as decades of federal jurisprudence 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.”
The CLARITY Act also addresses accounting standards by prohibiting the SEC from reimposing equivalent crypto-custody accounting requirements without undergoing a comprehensive notice-and-comment rulemaking process. While this removes a primary hurdle for institutional adoption, Muehlbauer cautioned that prudential regulators such as the Fed, OCC, and FDIC still make direct crypto custody operationally intensive for most traditional banks. Grigorov took a more optimistic view, suggesting that capital requirements and operational risks are solvable business challenges, and the bill establishes baseline conditions for institutional liquidity to flow on-chain.
Some Bitcoin-focused market participants argue the framework is overly tailored toward utility token issuers. Mark Zalan, CEO of Gomining, pointed out that for Bitcoin, the largest regulatory gaps remain unaddressed, particularly tax treatment. Because Bitcoin is treated as property, every transaction triggers a taxable event, making it impractical for daily commerce. Zalan concluded that a targeted de minimis tax exemption for small transactions, paired with clear protections for self-custody, mining, and noncustodial infrastructure, would do far more to unlock Bitcoin’s economic utility than sweeping market-structure rules alone.