On the morning of May 14, 2026, the Senate Banking Committee convened to review a 309-page document representing the Senate substitute amendment to the CLARITY Act. This session marks the most critical procedural milestone since the House of Representatives passed the original bill in July 2025 with a vote of 294 to 134. Stripping away legal jargon reveals the document's core objective: recognizing crypto assets as securities while establishing a distinct regulatory framework outside the traditional Securities Act. This approach does not overwrite existing laws or abolish bank deposit protections but creates a new legal category alongside current rules. The revised text, substantially rewritten over ten months by Senators Tim Scott and Cynthia Lummis, diverges significantly from the House version by introducing the concept of ancillary assets, regulating stablecoin interest rates, and expanding SEC jurisdiction. Data compiled by Woofun AI indicates that understanding these three underlying principles is essential for predicting US crypto regulatory development over the next two years.

The primary legislative hurdle addressed by the bill is the Howey test established in 1946, which defines a security based on investor expectations of profit generated by others' efforts. This test has historically categorized almost all tokens as securities, forming the basis for SEC prosecutions of Ripple, Coinbase, and Binance. The revised CLARITY Act does not attempt to overturn this cornerstone of case law. Instead, it introduces a new legal category termed ancillary assets. Under this definition, if a token's value relies on the entrepreneurial or managerial efforts of its issuer, it is initially treated as a security during issuance but transitions to an ancillary asset post-issuance. These assets are then governed by disclosure requirements rather than full registration mandates. Woofun AI notes that this legislative maneuver creates a middle ground where disclosure obligations are lower than those for securities but higher than for commodities, specifically designed for assets that do not fit existing classifications.

The structural implications of this new category provide a clearer legal path for token distribution within the United States, eliminating reliance on complex frameworks like SAFT, Reg D, or Reg S. A specific provision in the bill addresses tokens included in ETFs listed on US national stock exchanges as of January 1, 2026. These tokens, including BTC and ETH spot ETFs approved in January and July 2024 respectively, are explicitly exempt from being classified as ancillary assets. This provision effectively legalizes their status, ensuring they are neither considered securities nor ancillary assets. The bill also draws a critical distinction between DeFi protocols and their operators, a separation never previously codified at the legislative level. While code, nodes, and algorithmic components remain outside the Securities Act, individuals or groups controlling, modifying, or overseeing protocols are subject to regulation.

The legislation defines pseudo-DeFi protocols through three specific conditions: the existence of a group capable of controlling or altering protocol functions; operation not solely based on predefined transparent source code rules; or the ability to restrict protocol use through operational mechanisms. Projects meeting these criteria must comply with the 1934 Securities Act, including registration and anti-money laundering regulations. Woofun AI analysis suggests that many DAO-governed DEXes with multi-signature admin keys controlled by core teams will likely fall into this pseudo-DeFi category. The bill includes a narrow exemption for emergency pause mechanisms used strictly for cybersecurity incidents, provided they are publicly specified and lack unilateral control. Conversely, the code itself receives protection, exempting activities such as compiling transactions, operating nodes, and developing wallet software from securities jurisdiction, effectively recognizing code writing as free speech while retaining SEC authority over fraud and manipulation.

A highly controversial provision prohibits digital asset service providers from paying interest on stablecoins to US users, though it permits returns derived from credit or investment risk exposure. This includes rebates from transaction settlement, liquidity provision, collateral usage, and governance participation. Banking associations, including ICBA, BPI, and ABA, rejected this compromise on May 9, labeling it a loophole that threatens the deposit funding model of US banks. Rob Nichols, CEO of the American Bankers Association, urged immediate lobbying efforts, arguing that 80% of US bank loans rely on customer deposits. Senator Tillis responded by acknowledging the potential loophole but maintaining the legislative stance. This debate highlights a strategic effort to delineate a boundary between stablecoins and bank deposits, allowing stablecoins to serve as gateways to DeFi returns without functioning as interest-bearing deposits.

The downstream consequences of these provisions establish a compliant pathway for the DeFi lending market. Issuers like Circle and Paxos cannot directly pay interest, but users can obtain returns by depositing stablecoins into protocols like Morpho, Aave, or Compound where assets are exposed to credit risk. This solidifies the legal basis for RWA lending markets and on-chain credit markets.

However, significant risks remain regarding the implementation of these principles. The specific disclosure requirements for ancillary assets will be determined by SEC rule-making, potentially imposing costs similar to full securities registration if interpreted strictly.

Furthermore, the definition of true DeFi versus pseudo-DeFi remains subject to SEC interpretation, creating uncertainty for projects with semi-decentralized governance structures. The broadness of the credit risk exposure channel also raises concerns about the emergence of gray-area products similar to those offered by Celsius and BlockFi.

Even if the bill passes the committee, it faces a complex legislative journey including full Senate voting, merger with the Agriculture Committee version, coordination with the House, and final presidential signature. Polymarket estimates a 60-70% probability of the CLARITY Act becoming law in 2026. Regardless of the final text, the 309-page document has already shifted the national debate from whether crypto assets are securities to questions of disclosure levels, regulatory jurisdiction, and compliance standards. Woofun AI assesses that the industry is transitioning from enforcement-based and ambiguity-based regulation toward statutory regulation. The real battleground will now shift to regulatory agencies, where the interpretation of terms like controlling protocol functions and credit risk exposure will define the final regulatory landscape over the next 12 to 18 months.