The CLARITY Act is looking dead in the water, but the issues it set out to resolve aren’t going anywhere, as Lewis Rinaudo Cohen explains to the InterSection.
By John Gray
Back in April, when the InterSection unpacked the nuances and potential ramifications of CLARITY, we noted that the Act was hanging by a thread. That thread is about to snap. On September 15, the US Senate voted 49–50 on a procedural motion to advance the Digital Asset Market Clarity Act, short of the 60 votes required. Lawmakers note the failure was procedural, leaving a slim chance the bill could return during the post-election lame-duck session. This feels unlikely, though. Polymarket, a blockchain-based platform for trading on real-world events, currently puts the odds of CLARITY passing in 2026 below 5%, down from a high of 82% in February.
Nevertheless, the questions the Act asks and attempts to answer will not disappear. What, exactly, should count as decentralised finance? Where should regulatory responsibility begin and end? Is decentralisation even the right principle around which to draw that line? What does DeFi offer that TradFi cannot provide? These aren’t just legislative niceties. Rather, they go to the heart of what DeFi is now, and what it could become going forward. In this light, it seems like a good moment to stand back and take an expanded view of DeFi legislation. To do so, the InterSection spoke to someone who (arguably) knows more about the subject than anyone else: Lewis Rinaudo Cohen.
What counts as DeFi?
A prominent crypto-native lawyer, Cohen is Co-Chair of CahillNXT, the Digital Assets and Frontier Technologies practice of Wall Street law firm Cahill Gordon & Reindel. His recent article for Bloomberg Law, ‘Wave of Crypto Policymaking Means Lawyers Can Help Shape Rules’, co-authored with CahillNXT partner Sarah Chen, identifies the SEC’s definition of coordinated control as perhaps the most consequential piece of (prospective) rulemaking associated with CLARITY. In essence, the rule would help determine when a supposedly decentralised network remains sufficiently controlled by a coordinated group to stay within the SEC’s disclosure perimeter. But that raises a more fundamental question: can decentralisation ever be defined precisely enough to serve as a meaningful legal test?
Straight out of the gate, Cohen is optimistic about the potential of DeFi. “The concept of code deployed to a blockchain that operates itself, with users calling it when they want to, is extremely attractive. It presents an exciting alternative to traditional finance: it functionally removes intermediaries and lets the market operate in a very efficient way.” However, this vision of DeFi does not necessarily encapsulate the way many protocols actually operate. Admin keys, security councils and the ability to pause or roll back a project after an exploit all introduce some degree of human control. That makes the question facing lawmakers considerably more difficult than simply deciding whether something runs on a blockchain.
Cohen says the CLARITY Act’s drafters attempted to strike a balance between these competing realities. But as the bill evolved, he argues, there was less focus on getting the treatment of DeFi “exactly right”. In other words, the challenge for CLARITY was not simply to define DeFi, but to establish where decentralisation ends and regulatory responsibility begins. If CLARITY had made it through Congress, the SEC would have had to determine how its provisions applied in practice, potentially leaving some of the most consequential questions around the DeFi perimeter to the rulemaking process. Cohen sees this as a balancing act that is unlikely to be settled by the legislation alone.
“I think if DeFi is going to succeed, it’s important to recognise that what succeeds is a slightly different version of what was originally promoted. DeFi should, and always will, have a place, but an alternative way to think of this is as automation, particularly as we move into the world of AI. And I think with automation there is a greater level of responsibility. I think the DeFi community is trying to find that balance between responsibility, particularly at the front end, and the values, privacy and security that are essential to DeFi.”
Decentralisation may not be the right yardstick
In that regard, and with the distinction between DeFi and TradFi becoming increasingly blurred, can decentralisation ever be defined precisely enough to serve as a legal dividing line? For Cohen, the issue is not that decentralisation is meaningless. Rather, it describes something different from the questions regulators are trying to answer.
“Decentralisation is a hugely important concept for users as a principle, as a philosophy. It’s just not a great legal perimeter. It’s highly amorphous. It’s very technology-centric.” An awareness of this mismatch is already beginning to emerge in the SEC’s approach. Cohen points to the commission’s recent proposal for crypto asset regulation, which deliberately avoids taking decentralisation as the basis for defining the securities perimeter. He had argued for precisely this approach in a submission to the SEC’s crypto task force, ‘What We Talk About When We Talk About (Tokens)’, which the proposal cites extensively.
Investor protection for token holders and user protection for DeFi participants are not necessarily the same thing, and the characteristics of a token as an investment cannot be inferred solely from how decentralised the underlying protocol is. This becomes particularly apparent when considering what actually drives the value of many crypto tokens.
The conventional argument is that greater demand for a protocol creates greater demand for its token, making the token a measure of the protocol’s success. But, Cohen argues, that demand is often generated by the people building and improving the protocol, something particularly at issue with a decentralized application, or dApp, that must compete in the market for users. If the team behind a project walks away, the protocol may simply atrophy and die, taking the value of the associated token down with it – something seen increasingly regularly over the last few months. In other words, the existence of bona fide decentralised infrastructure that is not subject to “coordinated control” does not necessarily mean that the value of the related token is not highly reliant on the contributions of a single development company or team.
Cohen draws a further distinction between the decentralisation of a protocol and the experience of the person using it.“It’s different from decentralisation in the sense of: does someone have access to your private keys? The economic risk to a token holder and the ability of a user to have complete control over their assets are two different concepts, and they’re two different concerns. What is the value of holding this token; and, as a user, how disintermediated am I from others?”
This is a useful complication to a debate that can otherwise tend towards the binary. A protocol can reduce intermediaries for its users while still depending heavily on identifiable teams, while a token can function primarily as an investment regardless of the decentralised architecture sitting underneath it. For regulators, treating all of these characteristics as one question of “decentralisation” risks obscuring the distinctions that regulation is nominally supposed to address.
Lawmakers cannot manufacture demand for DeFi
A broader question is whether regulatory certainty would genuinely make it easier for DeFi to thrive in the US, or whether the rulemaking process could simply create another category of friction. “The amount of economic activity around governance tokens and true crypto assets is modest. What DeFi needs to succeed is people believing that there’s growth in the sector, that it’s worth someone taking the next year of his or her life to work on a protocol.”
For DeFi to attract developers, entrepreneurs and capital, there has to be a compelling reason to believe that the ecosystem will be more valuable tomorrow than it is today. And, in Cohen’s view, that increasingly means finding applications beyond the existing crypto-native economy. AI is already competing with DeFi for both financial and human capital, he argues, making it harder for the sector to sustain the excitement and investment needed to build new products. The opportunity instead lies in the crossover between DeFi’s technological infrastructure and the much larger pool of traditional financial assets, particularly through the tokenisation of so-called “real-world assets”.
“The larger success and growth of DeFi either stands or falls on the crossover between the scale of real financial assets and the tooling of DeFi. But that inherently involves compromises that are not purely regulatory in nature. There are a lot of practical business and other concerns if you’re putting real-world assets, securities of various types, equity or debt into this gear.”
Regulation could give institutional players the confidence to bring real-world assets onto blockchain-based infrastructure, without stepping outside an acceptable regulatory framework. But that would come with a trade-off. Tokenizing real financial assets inevitably introduces requirements and expectations that sit somewhat uneasily with the sector’s original ideals of autonomy and disintermediation. For Cohen, however, those compromises may be necessary if DeFi is to move beyond its current ecosystem.
“If we just stay where we are, there is a real risk of longer-term atrophy, and that’s not primarily because of regulation. It’s a question of people’s attention.” He notes that protocols and platforms are shutting down. “You might say: ‘I thought this protocol was immutable. What do you mean it’s shutting down?’ But, of course, we know what it means. It means the team gave up and left.”
That is an uncomfortable realisation for DeFi. Its resilience cannot be measured only by whether code remains deployed on a blockchain. If the people building, maintaining and developing that code lose interest, the ecosystem might wither. Cohen remains convinced that DeFi has something valuable to offer. The challenge, he suggests, is for the industry to be more candid about what it really is.
“It’s a really complicated thing, but it’s an important and exciting thing. And I do believe DeFi will succeed because it offers something different. Despite my realism, I’m absolutely bullish and excited about this space. I am just sometimes frustrated because I think the whole space, and many in the community, overpromise what it can deliver, and undersell what its true benefits are. I think we just have to be a good bit more honest as to what it can and can’t do.”
