The Clarity Act’s Clarity Problem
- Mark Hiraide
- 1 day ago
- 13 min read
Preemption, Blue-Sky Laws, and
the Fight Over Who Regulates Digital Assets
An Analysis by Mark Hiraide
Mark Hiraide is the Senior Legal Director & Policy Counsel at Investor Choice Advocates Network (ICAN), and a corporate/securities law partner with Mitchell Silberberg & Knupp LLP.
August 14th, 2026
Congress came within reach this past week of enacting the first comprehensive framework for regulating cryptocurrencies and, more broadly, digital assets. It did not get there. Below we review where that legislation stands and examine the obstacle we believe will decide its fate: federalism.
For years, the Securities and Exchange Commission declined to write rules for the digital asset industry. It deferred to Congress while regulating the space through enforcement, on the theory that most digital assets are “investment contracts” as defined by the Supreme Court in SEC v. W.J. Howey Co., 328 U.S. 293 (1946).
That enforcement-first era drew sharp judicial criticism. At least one federal court observed that the SEC repeatedly sued crypto companies for failing to comply with the law while refusing to tell them how to comply — a “caginess” that creates a serious due process problem,(1) because fair notice is a constitutional prerequisite to penalties that, although technically civil, function as punishment.(2)
Federal legislation is now close, but not done. Last July, Congress took the first step by enacting the Guiding and Establishing National Innovation for U.S. Stablecoins Act (the “GENIUS Act”), a framework for the issuance of payment stablecoins — digital tokens pegged to fixed monetary values. Investors have been waiting ever since for Congress to write the rules for the far larger universe of digital assets: instruments that exist only in digital form and carry specific usage rights, typically enabled by “smart contracts” that execute automatically when predetermined conditions are met. Unlike stablecoins, digital assets that trade in secondary markets on a blockchain derive their value, at least in theory, from the “invisible hand” of the market.
[1]Coinbase, Inc. v. SEC, 126 F.4th 175, 213 (3d Cir. 2025) (Bibas, J., concurring) (“The SEC repeatedly sues crypto companies for not complying with the law, yet it will not tell them how to comply. That caginess creates a serious constitutional problem; due process guarantees fair notice.”); see also id. at 214 (“Existing rules do not fit blockchain technology, but the SEC refuses to recognize this.”).
[2]Id. at 214 (explaining that although the penalties the SEC seeks are technically civil, they are “functionally criminal” because they “go beyond compensating victims to deter and punish,” and that “one cannot deter or fairly blame the defendant who does not know what the law forbids”); see also id. at 213–214 (“But while the APA lets agencies choose enforcement, the Constitution’s due-process requirements still protect defendants. Laws that punish and deter must meet due process’s heightened notice requirements…due process’s heightened notice requirements apply not only to criminal laws, but also to others that seek only to punish and deter. [¶] And the SEC is using the federal securities laws against the crypto industry to do just that. Its earlier enforcement actions against fraudsters sought to compensate victims. But now, in suing exchanges, the SEC has pursued injunctions, fines, and disgorgement. No victims are evident, yet the agency keeps seeking penalties. It targets not just fraudsters, but also the infrastructure on which much of the crypto industry relies.”).
Where the Clarity Act Stands
The centerpiece of the broader effort is the Digital Asset Market Clarity Act of 2025 (H.R. 3633). Among other things, the current version of the bill would draw jurisdictional lines between the SEC and the CFTC and create a new category of instrument: the “ancillary asset.”
An ancillary asset is an intangible asset, including a digital commodity, distributed pursuant to the purchase and sale of a security through an arrangement constituting an investment contract. The definition separates the asset from the transaction that distributed it — which is what allows the token itself to be treated as a commodity even though the offering that introduced it was a securities transaction. Taken as a whole, the bill applies a lighter regulatory touch to digital assets than the SEC’s investment-contract theory does.
The bill likewise creates a new category of regulated persons: “ancillary asset originators.” Here too the drafting borrows from familiar securities-law concepts. The definition captures not only the person who initially offers, sells, or distributes the asset, but in some circumstances also affiliates and the largest recipients of the asset in the twelve months following the initial distribution — an echo of the statutory underwriter.
The House passed its version of the bill on July 17, 2025, by a bipartisan vote of 294 to 134. The Senate has moved more slowly, splitting the work between two committees. The Senate Agriculture Committee, which oversees the CFTC, advanced the Digital Commodity Intermediaries Act (S. 3755) in January 2026 to give the Commodity Futures Trading Commission new authority over digital commodity spot markets. The Senate Banking Committee approved its amended version of the Clarity Act on May 14, 2026, by a vote of 15 to 9 — every Republican, joined by two Democrats, Senators Ruben Gallego and Angela Alsobrooks.
Last week the Senate left town for its August recess without advancing the bill to a floor vote. However, before leaving, Majority Leader John Thune said the bill would be queued up for a procedural vote at 2:15 p.m. on Tuesday, September 15, the day after the Senate reconvenes.
The path from there remains long. The calendar is unforgiving: roughly three weeks of floor time remain in September before attention turns to the midterm elections, and prediction markets now put the odds of enactment this year below twenty percent. History counsels against writing obituaries, though — the GENIUS Act lost its first cloture vote and became law weeks later.
What stands between the bill and the sixty votes it needs is a set of unresolved disputes over ethics, stablecoin yield, and illicit finance. The ethics dispute is the instructive one, because it has itself become a federalism dispute. The current text would bar public officials, their employees, and their spouses from issuing or sponsoring digital assets, but it vests enforcement exclusively in the U.S. Attorney General, with no role for state attorneys general and no private right of action. Seven Democratic negotiators — including Senators Gallego and Alsobrooks, the only two Democrats who voted to advance the bill in committee — have said the merged text falls short. Senator Alsobrooks has gone further: she now says she will not vote for the legislation unless states are given the power to prosecute violations. On that point, she says, she will not compromise.
Without the Clarity Act, the only national framework for classifying digital assets is the SEC and CFTC’s joint interpretive guidance of March 17, 2026, which sorted sixteen major digital assets into a regulatory taxonomy. That guidance is administrative, not statutory. A future administration could rescind it overnight. Only legislation endures.
Why Federalism Will Decide This Bill
Most of the attention paid to the Clarity Act has gone to stablecoin yield and the SEC–CFTC boundary. ICAN has been watching a different question, and in our view a more consequential one: the escalating conflict between the current Administration and state regulators, and what it means both for federalism and for the viability of the bill.
American federalism has always been a tug-of-war between national power and state autonomy. But the Administration’s campaigns against “sanctuary” jurisdictions, state climate policies, state gaming laws, and even state election administration have turned that ordinary tension into open constitutional conflict. The outcome of this period will shape the balance of power in our federal system for decades.
The doctrine that governs these fights is deceptively simple. Article VI’s Supremacy Clause makes federal law “the supreme Law of the Land.” The Tenth Amendment reserves to the states all powers not delegated to the federal government. State law yields in three situations: when Congress expressly displaces it, when compliance with both regimes is impossible, or when Congress has occupied an entire regulatory field. Applying that framework is harder than stating it, because the Supreme Court applies a presumption against preemption in areas of traditional state police power — and policing fraud in the sale of investments is a paradigmatic example.
Everything therefore turns on what Congress actually says. Whether the pending legislation delivers a uniform national framework that preempts state law, or instead leaves states with authority to police digital asset transactions, depends entirely on congressional intent as expressed in the statutory text. That is why the precise language of the Clarity Act matters so much. If Congress does not clearly define the boundaries of preemption, the industry may end up with less certainty than it had when digital asset regulation was left to the SEC’s enforcement program.
The NSMIA Template: What Clear Preemption Looks Like
Securities regulation is a natural laboratory for federalism, because it has long operated as a dual federal-state system.
Beginning as early as 1911, individual states enacted their own securities laws — the “blue-sky laws” — to regulate capital formation and protect resident investors. When Congress first regulated securities nationally through the Securities Act of 1933 and the Securities Exchange Act of 1934, it expressly declined to preempt state regulation. The result was a dual regulatory patchwork layered on top of the blue-sky regimes that nearly every state had already adopted.
The two systems differ in kind, not merely in degree. Federal law mandates registration and full disclosure, then leaves the investment decision to the investor. Most state blue-sky laws, by contrast, apply “merit review,” empowering a state securities commissioner to deny qualification to an offering the commissioner deems unfair, unjust, inequitable, or oppressive. The most famous illustration remains Apple’s 1980 initial public offering: the Massachusetts commissioner concluded that Apple did not meet the state’s qualification requirements, and Massachusetts residents were shut out of one of the great wealth-creating IPOs in American history.
Until 1996, a company had to comply with the federal securities laws and qualify its offering in every state where it offered securities. Even after most states adopted versions of the Uniform Securities Act providing for coordinated qualification, issuers and their counsel still had to research each state’s substantive and filing requirements and “blue sky” every offering state by state.
The National Securities Markets Improvement Act of 1996 (“NSMIA”) changed all that. It preempted state authority over the “registration or qualification” of “covered securities,” a category that includes exchange-listed securities, mutual fund shares, securities sold to qualified purchasers, and private offerings exempt under SEC Rule 506 of Regulation D. The Rule 506 preemption in particular unleashed early-stage capital formation. NSMIA also preempted state broker-dealer requirements — capital, custody, margin, recordkeeping, bonding, and financial reporting — that differed from federal standards.
Two features of NSMIA’s design deserve emphasis, because they are what make it a usable template.
First, its preemption is bounded by definition. Because NSMIA reaches only “covered securities,” states retain authority over registration and qualification of intrastate offerings. That has left room for state securities administrators and legislatures to adopt offering exemptions more innovative than their federal counterparts.
Second, NSMIA expressly preserved state authority to investigate and prosecute fraud in the sale of covered securities. That division — federal uniformity for market access, state power against fraud — has proved durable. Because federal and state anti-fraud statutes prohibit the same conduct, and state scienter requirements are sometimes even less demanding (as under New York and California law), preemption disputes over state fraud prosecutions have been rare.
The lesson is straightforward, and it is the one the digital asset debate should study: preemption works best when Congress says clearly what is preempted, and just as clearly what is not.
The GENIUS Act’s Compromise — and Its Open Questions
The GENIUS Act offers a preview of how Congress may try to split the difference in the digital asset context — and of how much work is left undone when the lines are drawn less precisely than NSMIA’s.
The GENIUS Act declares that compliant payment stablecoins are neither securities nor commodities, removing them from SEC and CFTC jurisdiction, and requires issuers to be either federally or state qualified. A state-qualified issuer with less than $10 billion in stablecoins outstanding may opt for state regulation, but only if federal authorities determine that the state regime is “substantially similar” to the federal one. Federally qualified issuers are licensed, regulated, examined, and supervised exclusively by the Office of the Comptroller of the Currency, expressly preempting state licensing and money-transmitter requirements. At the same time, the Act preserves state consumer protection laws, including common law remedies.
This dual structure nods to state interests, but it leaves consequential questions unresolved:
Who decides whether a state regime is “substantially similar,” and by what standard — and is a regime that exists only at federal sufferance federalism in name only?
Does exclusive OCC supervision preclude states from applying prudential rules — capital, liquidity, portfolio restrictions — that fall outside the expressly reserved categories of licensure, regulation, examination, and supervision?
Where is the line between preserved “consumer protection” laws and preempted regulations that are merely incidental to licensing?
Because the Act’s stablecoin definition excludes commodity-backed and algorithmic stablecoins, what happens at the definition’s edges?
Each ambiguity is a future lawsuit. The Clarity Act, which would cover a far broader class of instruments, will multiply them if drafted to the same tolerance.
States Are Not Waiting
From immigration to artificial intelligence, state officials are increasingly stepping in where they perceive federal enforcement gaps — a dynamic that extends well beyond securities. When the Administration paused Foreign Corrupt Practices Act enforcement by executive order in February 2025, for example, California’s Attorney General promptly advised businesses that foreign bribery remained actionable under the state’s Unfair Competition Law.
In the digital asset context, the same dynamic revives a familiar question: to what extent should Congress displace state blue-sky laws in the interest of uniform national regulation? State securities regulators, speaking through the North American Securities Administrators Association (“NASAA”), argue that state enforcement plays an essential investor-protection role, particularly against fraud in small or local offerings. The counterargument is structural: digital asset markets are inherently interstate — indeed global — which strains the premise that states can effectively oversee them alone.
State attorneys general have not waited for Congress to resolve the question. New York’s Attorney General has wielded the Martin Act in high-profile actions against crypto firms. A coalition of eighteen Republican attorneys general sued the SEC, seeking a declaration that digital assets are not investment contracts and an injunction against “regulation by enforcement,” framing the agency’s expansive jurisdictional claims as an intrusion on state sovereignty. Oregon pursued Coinbase even though the state had previously advised the public that digital assets were commodities rather than securities — a whipsaw that illustrates why firms cannot assume federal preemption will shield them from state-level risk.
The Sharpest Front:
Prediction Markets
The most vivid federalism battle is being fought over prediction markets. The question is whether states may regulate platforms such as Kalshi, Polymarket, and Crypto.com — and their intermediaries, including Coinbase — as unlicensed gambling operations, or whether the CFTC’s exclusive jurisdiction over swaps traded on federally designated contract markets preempts state gaming law entirely. CFTC Chairman Mike Selig left no doubt where the federal government stands, writing in a Wall Street Journal opinion piece that the agency would “no longer sit idly by” while states seek to prohibit event contracts the CFTC regards as within its exclusive jurisdiction.
The litigation map is now sprawling; more than twenty states have taken action.
New Jersey. Kalshi sued to block enforcement of the state’s Sports Wagering Act after receiving a cease-and-desist letter, and won a preliminary injunction. On April 7, 2026, the Third Circuit affirmed 2–1 in KalshiEX, LLC v. Flaherty, holding that sports event contracts fall within the Commodity Exchange Act’s swap definition and that Kalshi was likely to prevail on preemption grounds. It is the industry’s most significant appellate victory to date.
Nevada. The result has gone the other way. Kalshi won an injunction initially, but the federal district court dissolved it in November 2025. Kalshi then expanded aggressively — its app was downloaded over three million times in January 2026, more than DraftKings and FanDuel combined, and it reported over $1 billion in wagers on Super Bowl Sunday alone. The Nevada Gaming Control Board responded with state-court enforcement actions against Kalshi, Polymarket, and Coinbase, winning temporary restraining orders in early 2026. A Carson City judge remarked that Kalshi’s sports contracts were indistinguishable from bets placed at a licensed Nevada sportsbook. The Ninth Circuit heard consolidated arguments on April 16, 2026, before a panel that appeared sympathetic to the state, and in May it denied the platforms’ requests to halt state enforcement while the appeals proceed. Crypto.com, which lost its own bid for an injunction, has agreed not to offer sports contracts to Nevada residents pending appeal.
Massachusetts. The state became the first to go on offense in its own courts, suing Kalshi in September 2025. A Suffolk County Superior Court judge rejected Kalshi’s preemption defense as “overly broad” and enjoined the platform in January 2026. The state Appeals Court stayed the injunction pending expedited review, and the case appears headed for the Supreme Judicial Court.
New York. In late July the disputes escalated dramatically. A federal judge denied Kalshi’s request for an injunction on July 7, and the Second Circuit declined emergency relief later in the month. Within hours of Kalshi’s last federal avenue closing, Attorney General Letitia James filed a $36 billion civil enforcement action alleging unlicensed gambling and harm to users under twenty-one.
Two developments make this more than a gaming-law sideshow. The first is that the federal government has itself gone to court against the states: in April 2026, the CFTC sued Arizona, Connecticut, and Illinois — and later tangled with Wisconsin officials — to block state enforcement against Kalshi and Polymarket. The American Gaming Association has moved to intervene on the states’ side. The second is that the fight has reached the Clarity Act directly. California tribes have opened yet another front, arguing that Kalshi’s platform violates the Indian Gaming Regulatory Act on tribal lands, in an appeal supported by an amicus coalition of twenty-seven states and the District of Columbia — and tribal leaders have pressed the Senate to write a sports prediction-market ban into the Clarity Act itself.
With the Third Circuit on one side and the Ninth Circuit likely on the other, a circuit split — and ultimately Supreme Court review — appears increasingly probable. Until then, identical conduct is legal in Newark and enjoined in Las Vegas. That is precisely the kind of incoherence clear congressional drafting is supposed to prevent.
The Road Ahead: Toward Cooperative Federalism
With no comprehensive federal framework in place, more than forty states have introduced or enacted their own digital asset legislation, and states including California and Illinois have built full licensing regimes. The resulting patchwork imposes heavy compliance burdens on firms operating across state lines — the very burden NSMIA relieved for traditional securities offerings a generation ago — and it is the strongest argument for a national standard. Past clashes, such as those over New York’s BitLicense, foreshadow the litigation to come if Congress asserts exclusive federal jurisdiction without saying precisely what it means.
The most likely landing place is a model of cooperative federalism resembling banking regulation: clear federal minimum standards for investor protection, market integrity, and anti-money-laundering compliance; state implementation through regimes “substantially similar” to the federal framework, with information-sharing and continued state licensing under federal oversight; and clearly defined roles for the SEC and the CFTC. NSMIA teaches that the model can work — but only if Congress draws the preemption lines explicitly, preserving state anti-fraud authority while foreclosing duplicative merit-style gatekeeping.
Whether the bill clears its first procedural test on September 15, passes later this fall, or waits until 2027, the stakes extend far beyond crypto. It is telling that the Senate’s endgame now turns on whether state attorneys general may prosecute — the very question Senator Alsobrooks has declared non-negotiable. The Clarity Act is not just a crypto bill. It is a federalism bill, and the shape it finally takes will help determine the balance of power between Washington and the state capitals for the next era of American finance.
ICAN will continue to monitor the legislation and the broader federalism fight — and to advocate for a framework that gives investors both the uniform clarity of national rules and the enduring protection of state anti-fraud enforcement.
Comments