Removing Section 604 Could Spur First Amendment Fight

Industry groups and crypto executives say deleting Section 604 from the CLARITY Act would subject noncustodial software authors, node operators and validators to federal money-transmission rules and likely provoke a First Amendment lawsuit. They also say the change could push open-source development and projects offshore.

The U.S. House passed the CLARITY Act a year ago to set federal rules for digital assets. The bill has been stalled in the Senate amid opposition from banks and partisan disagreement. Supporters have pursued a vote before the August recess, but recent political controversy about a high-profile politician’s cryptocurrency earnings has been cited by opponents to slow the measure. Industry groups say removing Section 604 in any bipartisan compromise would remove key protections for developers.

Section 604 currently seeks to prevent noncustodial software creators and operators from being treated as money transmitters under federal law. Without that explicit carve-out, developers who write or publish smart contracts, run nodes or validate transactions could face Bank Secrecy Act reporting duties and anti-money-laundering obligations that apply to financial intermediaries. Industry lawyers say those requirements would create legal risk and operational burdens for open-source projects that do not hold customer funds.

Ivo Grigorov, chief executive of Real Finance, warned that developers need clear protection so publishing open-source code does not bring the same liabilities as running a financial intermediary. He and other executives expect uncertainty to drive innovation to countries with firmer legal rules.

Legal advisers and policy specialists say removing Section 604 would likely trigger constitutional litigation. Stefan Muehlbauer, head of U.S. government affairs at CertiK, argued that treating code writing as money transmission conflates speech with regulated financial activity and could lead to a First Amendment challenge. He pointed to court precedent that treats software source code as protected speech and added that enforcement pressure could push developers overseas.

Industry officials also point to stablecoins and cross-border transfers as reasons for a clear federal framework. Iana Dimitrova, chief executive of Openpayd, noted growth in stablecoin use for international value transfer and recommended building systems that allow traditional finance and digital assets to operate together under clear rules.

The CLARITY Act also addresses accounting. It recognizes the prior rescission of Staff Accounting Bulletin No. 121 and would stop the Securities and Exchange Commission from reimposing equivalent crypto-custody accounting requirements without a full notice-and-comment rulemaking. Policy advisers note that prudential regulators — the Federal Reserve, OCC and FDIC — would still apply capital and leverage rules that make bank custody of crypto costly.

Some market participants focused on bitcoin say the bill concentrates on token issuers and decentralization measures while leaving tax and self-custody issues for bitcoin unresolved. Mark Zalan, chief executive of Gomining, recommended a targeted de minimis tax exemption for small bitcoin transactions and explicit protections for self-custody, mining and noncustodial infrastructure.

With the Senate timetable uncertain, advocacy groups including Coin Center and the Blockchain Association describe Section 604 as nonnegotiable. Lawmakers and stakeholders continue to weigh law enforcement concerns and bank resistance against the risk that weakening developer protections will prompt litigation and relocation of talent and projects.