CLARITY Act Explained: The Token Classification Framework and What It Means for Listings
For nearly a decade, the central question in U.S. digital asset regulation has been deceptively simple: is this token a security or a commodity? The answer determines which federal agency has jurisdiction, what registration requirements apply, and whether an exchange can legally list the asset. The SEC claimed most tokens were securities under the Howey test. The CFTC asserted jurisdiction over digital commodities. And in the absence of legislation, the boundary was drawn case by case through enforcement actions, no-action letters, and court rulings that often contradicted each other.
The CLARITY Act -- Crypto Legal Accountability, Regulatory Integrity, and Transparency -- attempts to resolve this jurisdictional ambiguity by establishing a statutory classification framework. Whether it succeeds depends on how the categories are applied in practice, how the subjective elements of the framework are interpreted, and whether courts and regulators operate within the framework or around it.
The Three-Category Framework
The CLARITY Act establishes three primary classifications for digital assets, each carrying distinct regulatory consequences.
Restricted Digital Assets
A restricted digital asset is, in simplified terms, a token that functions like a security. The classification applies when the asset represents an investment in a common enterprise where holders expect profits primarily from the efforts of others -- the core elements of the Howey test, now codified in statute rather than derived from case law.
Tokens classified as restricted digital assets fall under SEC jurisdiction. Issuers must register the token under securities laws (or qualify for an exemption), provide ongoing disclosures, and comply with securities regulations governing trading, custody, and broker-dealer requirements.
The practical effect for exchange listings is significant. An exchange that lists a restricted digital asset must either be registered as a national securities exchange or operate under an exemption (such as an alternative trading system registration). The compliance burden is substantially higher than listing a digital commodity, which is why the classification boundary is the most commercially consequential question in the framework.
Critically, the Act provides a pathway for restricted digital assets to transition out of this category. If a token's underlying network becomes "functionally decentralised" (a term defined in the Act with criteria discussed below), the token can be reclassified as a digital commodity. This decentralisation pathway is the Act's most novel -- and most contentious -- feature.
Digital Commodities
A digital commodity is a digital asset that does not meet the criteria for a restricted digital asset or a payment stablecoin. The classification encompasses tokens associated with decentralised networks where no single entity or coordinated group controls the network's operation, governance, or development in a way that creates the investment-contract relationship at the heart of the Howey test.
Digital commodities fall under CFTC jurisdiction for purposes of derivatives regulation, market manipulation, and fraud. Spot trading of digital commodities is subject to a lighter regulatory framework than securities trading, though the Act does grant the CFTC explicit authority over spot markets for digital commodities -- an expansion of the CFTC's traditional role, which historically covered only derivatives.
Bitcoin and Ether are widely expected to be classified as digital commodities under the framework. The Act does not name specific tokens, but the legislative history and committee discussions indicate that both were considered paradigmatic examples of decentralised digital assets. For the broader universe of tokens currently listed on exchanges, the classification is less clear and will depend on case-by-case analysis of each token's decentralisation status.
Payment Stablecoins
The third category -- payment stablecoins -- captures tokens designed to maintain a stable value relative to a national currency and intended for use as a medium of exchange or store of value. Under the CLARITY Act's framework, payment stablecoins are regulated separately under the GENIUS Act's stablecoin-specific requirements, which mandate reserve backing, monthly disclosures, and issuer licensing.
This category is the most straightforward in application. USDC, USDT, and similar dollar-pegged tokens that meet reserve and licensing requirements fall neatly into this classification. The regulatory questions for stablecoins are addressed primarily through the GENIUS Act framework rather than the CLARITY Act's classification mechanism.
SEC vs CFTC Jurisdiction Under the Act
The CLARITY Act attempts to draw a clear jurisdictional boundary. The SEC retains authority over restricted digital assets, including token issuances, secondary market trading, and the initial distribution phase of tokens that later become digital commodities. The CFTC gains explicit authority over digital commodity spot markets -- a meaningful expansion beyond its traditional derivatives-only remit -- requiring digital commodity exchanges to register and comply with trading, custody, and market integrity requirements.
When a token transitions from restricted digital asset to digital commodity through the decentralisation pathway, jurisdiction shifts from the SEC to the CFTC. The issuer or a qualified third party submits a decentralisation assessment, the SEC reviews it and can challenge within a specified period. This transition mechanism creates a strong incentive for projects to pursue genuine decentralisation.
What This Means for Exchange Listing Decisions
The CLARITY Act transforms the listing process from a legal guessing game into a structured analysis. A token certified as a digital commodity can be listed on a CFTC-registered exchange with confidence. A token classified as a restricted digital asset requires listing on a securities-compliant platform. Tokens that have completed neither the decentralisation assessment nor securities registration exist in a limbo where no compliant U.S. platform can comfortably list them.
For token projects, this creates clear strategic options: pursue securities registration, pursue the decentralisation pathway, or accept that U.S. exchange listings are unavailable until one path is completed. Our Altcoin Dossiers section examines individual token projects, and the CLARITY Act framework adds a new analytical dimension to those assessments.
The Decentralisation Test and Its Subjective Elements
The CLARITY Act's decentralisation test is the framework's pivot point. It determines which tokens graduate from SEC jurisdiction to CFTC jurisdiction, and it defines the criteria for a category shift that has enormous commercial consequences.
The Act specifies several criteria for "functional decentralisation," including:
No single entity or coordinated group controls the network. This means that no person, foundation, or coordinated set of actors has unilateral ability to alter the protocol's rules, reverse transactions, or control the validation process. Governance through token voting is permitted, but concentrated token holdings that give de facto control to a small group may undermine the decentralisation claim.
The network operates without reliance on the issuer's efforts. Users and validators can operate the network, process transactions, and maintain the protocol even if the original development team ceases to exist. This is straightforward for Bitcoin, where no identifiable issuer exists. It is more complex for tokens launched by identifiable companies or foundations that continue to drive development and governance.
Open-source and permissionless participation. The network's code must be open source, and participation in validation, governance, and usage must be permissionless. Permissioned networks -- where a defined set of validators is selected by a central authority -- are unlikely to meet this criterion.
Information asymmetry. No person should possess material non-public information about the network that could be used for trading advantage. This criterion targets the insider advantage that exists when a development team has advance knowledge of protocol changes, partnerships, or technical developments that will affect the token's value.
The subjective elements are significant. "Control" exists on a spectrum. A foundation that funds core developers and controls the GitHub repository but does not directly control the consensus mechanism has some degree of centralisation -- whether it rises to the level of "control" under the Act depends on interpretation. A token with 40% of supply held by insiders who vote in governance may be technically permissionless but functionally controlled.
These subjective boundaries will be defined through the certification process, SEC challenges to certification submissions, and eventually through court rulings. The first generation of decentralisation assessments will establish precedents that shape how the criteria are applied to subsequent tokens.
How Token Projects Should Approach Compliance
The CLARITY Act creates a decision tree for token projects. First, determine your token's current classification honestly -- if it was sold to investors expecting profits from the team's efforts, it is likely a restricted digital asset. Then choose a path: pursue securities registration, or work toward functional decentralisation by transitioning governance to a distributed community, open-sourcing all code, reducing insider token concentration, and ensuring the network operates independently of the founding entity.
When the project meets the criteria, submit a decentralisation assessment for SEC review. Critically, reclassification is not permanent -- a network that re-centralises after obtaining digital commodity status could face reclassification.
Where Existing Tokens Fall
While the Act does not classify specific tokens, reasonable analysis suggests general categories. Bitcoin is the clearest digital commodity case -- no identifiable issuer, fully decentralised, open source, permissionless. Ether is widely expected to qualify, though the Ethereum Foundation's role introduces marginal questions.
Tokens launched through ICOs, those with identifiable teams controlling protocol development, and those with concentrated insider holdings likely classify as restricted digital assets initially, though they may pursue the decentralisation pathway. The grey zone -- tokens with partial decentralisation, where governance is concentrated or a single entity controls key infrastructure -- will generate the most litigation.
The Altcoin Dossiers section will increasingly incorporate CLARITY Act classification analysis as precedents develop.
Gaps and Likely Litigation Areas
The CLARITY Act addresses the most acute regulatory uncertainty in U.S. crypto markets, but it does not resolve everything. Several areas are likely to generate litigation and further regulatory guidance.
Decentralisation disputes. The subjective elements of the decentralisation test guarantee that some certifications will be challenged. The SEC may argue that a network with a dominant foundation or concentrated token holdings fails to meet the "no single entity controls" criterion. The project will argue otherwise. Courts will ultimately decide, creating a body of case law that refines the statutory criteria.
Retroactive classification. Tokens already trading on U.S. exchanges must eventually be classified, but the process for the existing universe of tokens is not fully specified. Whether the SEC will pursue enforcement against pre-Act listings or provide a safe harbour remains uncertain.
Cross-category tokens. Some tokens straddle category boundaries -- a governance token with stablecoin mechanisms, or one functioning as both commodity and payment instrument. The Act does not address hybrid classifications.
International coordination. As discussed in our MiCA deadline analysis, the EU framework takes a structurally different approach. International token projects must navigate both frameworks, and the classifications may not align.
DAO governance tokens. If a DAO generates revenue and distributes it to holders, the token looks like a security. If the token only confers voting rights with no economic return, it may not meet Howey's "expectation of profits" element. The line remains blurry.
Comparison With MiCA Classification
MiCA categorises based on function and reference asset rather than the securities/commodities distinction. It distinguishes between general crypto assets, e-money tokens (single-currency stablecoins), and asset-referenced tokens (multi-asset stablecoins). A token that is a restricted digital asset under the CLARITY Act might be a general crypto asset under MiCA, subject to white paper requirements but not securities registration.
This divergence means global exchanges must classify each token under both frameworks and may reach different conclusions. As discussed in our MiCA deadline analysis, international token projects must navigate both frameworks simultaneously, creating compliance complexity and strategic decisions about which markets to prioritise. The Research section tracks developments across both regulatory frameworks.
FAQ
Does the CLARITY Act mean all tokens need to be registered as securities?
No. The Act establishes three categories, and only "restricted digital assets" require securities registration. Tokens classified as digital commodities are regulated by the CFTC under a separate framework, and payment stablecoins are regulated under the GENIUS Act. The key determination is whether a token meets the criteria for functional decentralisation -- if it does, it is classified as a digital commodity and is not subject to SEC securities registration requirements.
How does a token transition from restricted digital asset to digital commodity?
The Act creates a certification process. The token issuer or a qualified third party submits a decentralisation assessment to the SEC demonstrating that the network meets the functional decentralisation criteria (no single controlling entity, permissionless participation, open-source code, no material information asymmetry). The SEC reviews the assessment and can challenge it within a specified period. If the SEC does not challenge, or if the challenge is resolved in the project's favour, the token is reclassified as a digital commodity and jurisdiction transfers to the CFTC.
What happens to tokens already listed on U.S. exchanges?
The Act does not automatically require delisting, but exchanges face compliance risk if they continue listing tokens that should be classified as restricted digital assets without securities registration. In practice, exchanges will need to assess listed tokens against the framework and either confirm digital commodity status or delist those that cannot be justified. The timeline depends on SEC and CFTC enforcement priorities.
Can a token lose its digital commodity classification?
The Act does not explicitly address reclassification from digital commodity back to restricted digital asset, but the classification is based on ongoing conditions. If a network that was certified as functionally decentralised subsequently re-centralises -- for example, through governance capture, concentration of validator control, or a single entity resuming control of protocol development -- the factual basis for the classification would no longer hold. Whether the SEC would initiate a reclassification process in such a scenario is not specified, but the legal basis for doing so exists if the decentralisation criteria are no longer met.
How does the CLARITY Act affect DeFi protocols?
DeFi protocols that are truly decentralised -- with no identifiable operator, no upgradability controlled by a single party, and fully permissionless participation -- may fall outside the Act's scope, since the Act regulates issuers and service providers rather than autonomous code. However, protocols with identifiable governance structures, upgrade mechanisms controlled by a core team, or front-end operators may be treated as the issuers or service providers of the tokens they create or the services they facilitate. The boundary will be defined through enforcement and litigation, and projects should not assume that labelling something "decentralised" provides regulatory immunity.