Law enforcement, Catholic groups warn on CLARITY Act

Four U.S. law enforcement groups and a coalition of Catholic organizations sent letters on Tuesday raising concerns that Section 604 of the CLARITY Act could limit oversight of illicit use of digital assets.

The law enforcement letter, addressed to Acting Attorney General Todd Blanche and White House digital assets adviser Patrick Witt, came from 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.

Those groups warned that the provision, known as the Blockchain Regulatory Certainty Act, could ‘create oversight gaps, hinder illicit-activity probes and weaken Know-Your-Customer and Anti-Money-Laundering requirements’ compared with traditional finance. The letter added, ‘Regulatory certainty should not come at the expense of accountability, transparency, victim protection, or public safety.’

The Alliance to End Human Trafficking, founded by U.S. Catholic Sisters, sent a separate letter to Senate Republican Leader John Thune and Senate Democratic Leader Chuck Schumer. The group said certain provisions could produce ‘broad carveouts and regulatory ambiguities’ that make it ‘more difficult to responsibly monitor illicit financial activity tied to trafficking, organized crime, child exploitation, sanctions evasion and other forms of abuse.’

Section 604 seeks to clarify when developers and software tools are treated as money transmitters. The text aims to protect non-controlling developers, open-source contributors, self-custody software and some decentralized finance infrastructure from automatic classification as money transmitters.

The law enforcement signatories said the language could be read to exempt some crypto transactions from rules that aid investigations, including existing KYC and AML practices, and could make it harder to trace criminal transfers of digital assets.

Supporters of the bill say the provision is narrowly focused on non-custodial software creators and does not shield criminal conduct. Lindsay Fraser, chief policy officer at the Blockchain Association, described the letter as a ‘fundamental misunderstanding’ and wrote that Section 604 ‘prevents non-custodial software developers from being misclassified as money transmitters when they do not custody assets or control transactions.’

Senator Cynthia Lummis, a sponsor of the CLARITY Act, argued the bill would reduce regulatory uncertainty for developers and stated it ‘closes the gaps bad actors exploit.’ She has emphasized that writing code should not be treated as money transmission.

The CLARITY Act passed the Senate Banking Committee in May, with many Democrats opposing it. The bill is scheduled for a House hearing on July 17. Banking industry groups have warned the measure could allow crypto firms to offer yields on stablecoins without the same regulatory requirements as traditional banks.

Lawmakers will consider whether to narrow or clarify the bill’s exemptions before further action.