The Digital Assets Market Clarity Act, approved by the Senate Banking Committee on May 14, will set the rules of conduct for an industry that has grown faster than the laws meant to govern it.
Almost everyone agrees that crypto regulation is overdue. But as the bill heads toward a vote in the Senate, it contains five loopholes that threaten to undermine the very structure and stability the legislation otherwise hopes to provide.
The decentralized finance or “DeFi” gap
A platform or intermediary that moves, exchanges, hides or facilitates the transfer of value should not be able to escape surveillance simply by calling itself “decentralized”. North Korean hackers have repeatedly exploited mixers and other virtual asset laundering infrastructure to move stolen cryptocurrencies and help fund the regime’s weapons programs. Treasury discovered that Tornado Cash was used to launder more than $455 million stolen by the Lazarus Group, and UN experts reported that North Korea then laundered an additional $147.5 million through the same platform. These are exactly the blind spots Congress needs to address: When a digital asset platform or intermediary performs financial functions, it should be subject to appropriate anti-money laundering and sanctions safeguards.
The so-called “Tornado Cash” loophole
Some crypto tools are designed to continue working automatically, even if it becomes clear that they are being used to launder money. When anti-money laundering rules apply to a person but evaporate the moment software performs the same task, the result is not a guarantee: it is a workaround written into law. The emergency is not hypothetical. Last May, FinCEN warned U.S. banks that Iran’s Islamic Revolutionary Guard Corps had built a multi-jurisdictional shadow banking network – combining digital asset infrastructure with shell companies and exchange houses – to launder oil revenues and finance arms purchases and terrorism. Congress should give the Treasury Department’s Office of Foreign Assets Control (OFAC) the explicit authority it needs to take action against anonymization tools used to evade sanctions.
The gap between stablecoins
The GENIUS Act, passed earlier this year, established the basic framework for stablecoin issuers, but allowed illicit actors to circumvent that framework through DeFi protocols, offshore platforms, mixers, or other services that move stablecoins without meaningful controls. Sanctioned Russian entities have already used stablecoins, including through platforms that impose no identity verification requirements, to move funds and maintain financial networks. The Clarity Act should require stablecoin issuers to implement reasonable ecosystem-wide monitoring to identify and report suspicious activity. Without this broader visibility, stablecoins risk becoming the preferred channel for sanctions evasion, fraud, ransomware, trafficking and corruption-related money laundering.
The jurisdictional gap
A platform that serves U.S. customers or routes its business through the U.S. financial system should not be able to avoid its anti-money laundering and sanctions obligations by simply registering its headquarters abroad. The Justice Department recently charged a Venezuelan national with allegedly laundering approximately $1 billion through a network using bank accounts, cryptocurrency exchange accounts, private wallets, shell companies, and transactions to and from the United States. Such cross-border flows are precisely those that slip through the cracks when platforms choose the jurisdiction that is subject to the lightest control. If a platform or intermediary facilitates illicit financing, it must be cut off from the legitimate financial system.
The ethical gap and conflict of interest
Four days before the 2025 inauguration, a member of President Trump’s immediate family reportedly signed a deal to sell a 49% stake in his crypto business, World Liberty Financial, to an Abu Dhabi-backed entity for half a billion dollars. According to The Wall Street Journalthe Trump administration then approved the UAE’s access to 500,000 of the world’s most advanced AI chips, overcoming long-standing national security objections. The Clarity Act is now moving forward under an administration whose family has direct financial interests in the same digital asset companies that the bill would govern. No unbiased cryptography framework can be built on this basis. Clarity law must ban public officials And members of their immediate family from owning, promoting, sponsoring, endorsing or soliciting investments in digital asset businesses while the official is in office.
These five gaps are not abstract concerns. Each of them corresponds to activity already underway: sanctioned states moving money, foreign officials laundering bribes, hostile actors funding weapons programs, and the family of a sitting president selling stakes in the industry the legislation is supposed to regulate. Congress has the opportunity to craft rules that protect the integrity of the U.S. financial system. It also has the ability to write rules that discreetly adapt to those who would like to exploit it. The version of the Clarity Act currently before the Senate does not yet make a clear enough distinction between the two.
The choice before the Senate is not whether or not to regulate crypto. It’s a question of whether the rules written by Congress will be strong enough to do what the regulations are supposed to do: protect consumers, defend America’s national security, and ensure that public service cannot be used for personal or family gain. Five gaps exist between this bill and this standard. They can and should be closed.
