CLARITY Act critics say Section 604 may weaken crypto crime investigations

The CLARITY Act has drawn fresh opposition from U.S. law enforcement organizations and anti-trafficking advocates ahead of a House hearing scheduled for July 17, with both groups warning that a provision tied to decentralized finance could weaken oversight of illicit financial activity.

Four law enforcement organizations said in a letter sent Tuesday to Acting Attorney General Todd Blanche and White House digital assets adviser Patrick Witt that Section 604 of the legislation could create regulatory gaps, hinder investigations and weaken Know Your Customer and Anti-Money Laundering requirements compared with those applied in traditional finance.

The letter was signed by the National District Attorneys Association, the National Association of Assistant United States Attorneys, the International Association of Chiefs of Police and the National Sheriffs’ Association.

“Regulatory certainty should not come at the expense of accountability, transparency, victim protection, or public safety,” the organizations wrote.

Section 604 incorporates the Blockchain Regulatory Certainty Act and establishes protections for certain non-custodial participants in the digital asset sector. The provision seeks to prevent non-controlling developers, open-source contributors, self-custody tools, and certain decentralized finance infrastructure providers from automatically being classified as money transmitters.

The law enforcement groups said they do not oppose software development or technological innovation. Their concerns focus on exemptions that could affect authorities’ ability to investigate transactions involving digital assets.

“Our concern is with broad exemptions that may shield individuals or entities whose activities facilitate the movement of digital assets, create obstacles to legitimate oversight, or weaken longstanding investigative and enforcement authorities relied upon by law enforcement,” the letter stated.

Industry defends Section 604

Lindsay Fraser, chief policy officer at the Blockchain Association, rejected the criticism and said opponents have misunderstood the provision.

Fraser said Section 604 only prevents non-custodial software developers from being treated as money transmitters when they neither hold customer assets nor control transactions, adding that the provision does not protect criminals from prosecution or restrict enforcement actions related to money laundering, fraud, sanctions violations or terrorist financing.

Senator Cynthia Lummis, one of the bill’s leading supporters, defended the measure in statements posted this week. On Thursday, Lummis said regulatory ambiguity benefits criminals and argued that the CLARITY Act would close gaps exploited by bad actors.

In a separate statement Tuesday, Lummis said the legislation makes clear that writing software code does not constitute money transmission.

Anti-trafficking group raises similar concerns

The Alliance to End Human Trafficking sent a separate letter Tuesday to Senate Republican Leader John Thune and Senate Democratic Leader Chuck Schumer, urging lawmakers to reconsider the same provision.

The Catholic-backed organization said Section 604 could create regulatory ambiguities and broad carveouts that make it harder to monitor financial activity connected to human trafficking, organized crime, child exploitation, sanctions evasion and other illicit conduct.

“The test of any financial system is not simply whether it generates wealth or innovation, but whether it safeguards human life and dignity,” the group wrote.

The latest objections add to a growing list of groups seeking changes to the legislation as lawmakers continue negotiations over the crypto market structure bill.

The CLARITY Act cleared the Senate Banking Committee in May despite opposition from most Democratic members. Banking industry groups have also criticized parts of the legislation, arguing that some crypto firms could offer stablecoin yields without facing the same regulatory requirements imposed on traditional financial institutions.

The Alliance to End Human Trafficking previously urged Senate leaders to strengthen anti-money laundering safeguards within Section 604. The organization argued in a June 23 letter that lawmakers should examine whether the provision contains sufficient accountability measures before advancing the bill.

Senate leaders have not scheduled a floor vote on the legislation. Cody Carbone, chief executive of The Digital Chamber, has urged lawmakers to move the bill forward and argued in recent Senate testimony that digital assets could reduce payment costs and improve financial access for consumers.

Digital asset industry advocates have also linked passage of the CLARITY Act to broader institutional participation in the sector. Financial adviser Ric Edelman recently argued that regulatory uncertainty remains a major obstacle for institutions considering crypto exposure and said clearer rules could encourage additional capital to enter the market.