Inside CLARITY Act Civil War & Coinbase: The $6.6 Trillion Risk

CLARITY was built to end the regulatory fog around U.S. crypto. Instead, it has stalled after Coinbase pulled support on the eve of a Senate vote. The fight now turns on three pressure points: stablecoin yield economics, DeFi compliance obligations, and who ultimately controls market jurisdiction, the SEC or the CFTC. What hangs in the balance is not just policy language, but trillions in bank deposits, billions in exchange revenue, and the architecture of U.S. digital asset markets.

Introduction: A Midnight Shock

On the night of January 15, 2026, as the crypto market waited for a historic turning point, news rippled through Capitol Hill: The U.S. Senate Banking Committee announced it was postponing the markup vote on the CLARITY Act (Digital Asset Market Clarity Act of 2025), the most comprehensive digital asset market structure bill ever proposed in the United States.

This delay did not resemble routine procedure. It exposed fractures inside the crypto industry, across both parties, and within the broader financial system, with a mounting power struggle between traditional banking and decentralized finance platforms. With more than 137 proposed amendments and the sudden withdrawal of Coinbase, the largest U.S. cryptocurrency exchange, from the supporting coalition, CLARITY now faces a real risk of becoming one of the most painful legislative breakdowns in the history of U.S. digital asset regulation.

Why did a bill designed to bring clarity turn into a battlefield? The answer lies where conflicting interests collide: regulatory jurisdiction between the SEC and CFTC, a trillion-dollar competition between banks and stablecoin platforms, and privacy backlash surrounding DeFi compliance.

Part I: What Is CLARITY And Why Does It Matter?

Background and Origins

The CLARITY Act, formally known as the Digital Asset Market Clarity Act of 2025, was introduced by House Financial Services Committee Chairman French Hill on May 29, 2025. The bill aims to establish a clear legal framework for the U.S. digital asset market, a result the industry has demanded for years.

For more than a decade, the U.S. crypto sector has operated inside an ambiguous and high-risk regulatory environment. The Securities and Exchange Commission has argued that most tokens are securities. The Commodity Futures Trading Commission has been widely viewed as the more natural regulator for digital commodity spot markets. This unresolved split has left exchanges, token issuers, and investors uncertain about which rules apply.

Key Provisions of the Bill

CLARITY is a large legal package, close to 300 pages, built around several core provisions:

1. Regulatory Jurisdiction: The bill grants the CFTC exclusive jurisdiction over spot markets for digital commodities, while maintaining SEC oversight of investment contract assets.
2. Clear Definitions: CLARITY defines blockchain, blockchain applications, blockchain protocols, and related technical concepts used to determine when a token qualifies as a security versus a commodity.
3. Registration System: It establishes a registration regime for digital commodity exchanges, brokers, and dealers under CFTC jurisdiction.
4. Consumer Protection: It adds requirements tied to custody, risk management, and cybersecurity for participants in digital asset markets.
5. CBDC Prohibition: It also includes provisions prohibiting the Federal Reserve from offering a central bank digital currency directly to individuals.

Legislative Journey

On July 17, 2025, CLARITY passed the House with a 294 to 134 vote, a major bipartisan victory. The bill then moved to the Senate.

Senator Tim Scott, Chairman of the Senate Banking Committee, released a discussion draft in July alongside Senator Cynthia Lummis. By September, the Committee published a 182-page discussion draft of the Responsible Financial Innovation Act of 2025, refining CLARITY language.

Momentum appeared intact until a markup vote was scheduled for January 15, 2026. Then negotiations broke down.

Part II: Coinbase's Shocking Withdrawal

"We'd Rather Have No Bill Than a Bad Bill"

Just 24 hours before the scheduled vote, Coinbase CEO Brian Armstrong posted a statement on X saying the company could not support the CLARITY Act in its current form.

Armstrong listed four issues behind the decision:

1. De Facto Ban on Tokenized Equities: The bill includes language that would effectively block trading of tokenized stocks, an area Coinbase views as central to future growth.
2. DeFi Restrictions: The bill extends Bank Secrecy Act obligations deep into DeFi protocols, potentially forcing software developers and non-custodial entities to collect user data and file suspicious activity reports.
3. Weakening CFTC Authority: Rather than strengthening the CFTC as a counterweight to the SEC, the bill allegedly subordinates CFTC authority to the SEC, reinforcing the enforcement-heavy status quo.
4. Stablecoin Reward Ban: The bill prohibits platforms from paying interest or rewards on stablecoin holdings, a direct hit to Coinbase’s core business model.

“We appreciate all the hard work by members of the Senate to reach a bipartisan outcome, but this version would be materially worse than the current status quo,” Armstrong wrote. “We’d rather have no bill than a bad bill.”

Immediate Fallout

Coinbase's withdrawal triggered an immediate reaction. Senate Banking Committee Chairman Tim Scott postponed the scheduled markup vote, acknowledging that the legislation required further negotiation.

Scott said: “As a result of ongoing discussions, the Committee postponed the planned markup to continue refining the legislation. I’ve spoken with leaders across the crypto industry, the financial sector, and my Democratic and Republican colleagues, and everyone remains at the table working in good faith.”

The Business Reality Behind Armstrong's Decision

Capitol Hill reacted sharply for a reason. Coinbase’s stablecoin strategy has become a billion-dollar revenue engine.

According to S&P Global Market Intelligence estimates published in late 2025, Coinbase’s stablecoin-related revenue surged to approximately $1.4 billion in 2025, a 49% year-over-year increase. This stream now accounts for roughly 22% to 41% of total revenue, transforming Coinbase from a trading-fee-dependent exchange into a diversified financial services platform. In 2020, subscription and services revenue represented roughly 4% of total revenue. By 2025, that figure had climbed to 41%.

The mechanics are simple and lucrative. Coinbase shares a 50/50 revenue split with Circle on interest earned from USDC reserves held at regulated banks. With USDC reaching an all-time-high market capitalization of $76 billion and average USDC held in Coinbase products exceeding $15 billion, interest income generated $332.5 million in Q4 2025, the first time stablecoin revenue crossed $300 million in a single quarter.

For retail users, Coinbase offers roughly 3.5% to 4.1% APY on USDC balances, far above the 0.07% to 0.39% typically offered by traditional banks. This yield advantage has become central to user acquisition and retention, particularly through Coinbase One.

The proposed stablecoin reward ban in CLARITY would dismantle this model. Armstrong’s move was not only ideological. It was a defense of a revenue stream worth more than a billion dollars annually.

This context also explains why other crypto firms, especially those less dependent on stablecoin yields, found it easier to maintain support.

Part III: The Stablecoin Yield War: Banks vs. Crypto

The $6.6 Trillion Threat

While crypto firms debated jurisdiction, the banking lobby focused on deposit protection.

The American Bankers Association, alongside 52 state banking associations, sent a letter to the Senate warning that if stablecoin platforms continue paying interest to holders, up to $6.6 trillion in deposits could migrate out of the traditional banking system.

“Without clear statutory language extending this prohibition in market structure legislation now being advanced, trillions will be displaced from community lending, and the financial fabric of towns and neighborhoods nationwide will be weakened,” the ABA wrote.

The Truth Behind the Numbers

The rate gap reveals the real stakes.

According to FDIC national deposit rate data published December 15, 2025:

• Average checking account interest rate: 0.07%
• Average savings account interest rate: 0.39%
• U.S. Treasury benchmark yield: 3.89%
• USDC yield on Coinbase: approximately 4%

Traditional banks pay depositors far below what deposits can earn in Treasury-linked instruments. Crypto platforms pass more of that yield directly to users.

Brian Armstrong called the banking lobby case “mental gymnastics,” arguing that institutions invoking safety concerns were simultaneously defending a model built on structurally underpaying customers.

The GENIUS Act Loophole

The issue is further complicated by the GENIUS Act, the stablecoin law that President Trump signed in July 2025. GENIUS prohibits stablecoin issuers like Circle and Tether from paying interest directly to holders. However, the law allows intermediaries like exchanges to pass yields from underlying Treasury reserves to users.

This is precisely the "loophole" the banking lobby wants closed in CLARITY. The revised draft from January 14 contains a clause that also excludes exchanges and affiliates from paying yields.

Coinbase generates substantial revenue from stablecoin products like USDC yields, making this proposed ban a direct threat to their business model.

The Stakes of This Battle

According to Bernstein estimates, total stablecoin supply will reach approximately $420 billion by the end of 2026, representing 56% growth from the current $309 billion level. Citi's longer-term forecast projects stablecoin issuance at $1.9 trillion in a base case and $4 trillion in a bull case by 2030.

With annual reward rates of 1.5% to 2.5%, this translates to:

• 2026: Rewards pool of $6.3 billion to $10.5 billion/year
• 2030: Rewards pool of $28.5 billion to $47.5 billion/year

This is the real economic battlefield where banks, exchanges, and issuers compete for customer balances and payment flows.

Part IV: DeFi And The Privacy Controversy

The Largest Expansion of Financial Surveillance Since the Patriot Act

Beyond stablecoin yields, another fierce point of contention is the bill's DeFi provisions.

Alex Thorn, Head of Research at Galaxy Digital, offered a sharp assessment: CLARITY represents "the most significant expansion of government financial surveillance power since the USA Patriot Act of 2001."

The DeFi regulations in the Senate draft require:

• Treasury to define how DeFi platforms and protocols must comply with the Bank Secrecy Act and anti-money laundering rules
• DeFi front-end applications may need to register with the SEC or CFTC
• Developers may be required to monitor transactions, collect user data, and report suspicious activity

This directly contradicts DeFi's core philosophy of permissionless access. Non-custodial users, those who control their own private keys, are not exempt either. New provisions could compel surveillance of wallet interactions, eroding privacy for everyday holders.

Opposing Views of Both Parties

The DeFi divide reflects deep philosophical differences between Republicans and Democrats.

Democratic Position: In October 2025, 12 Democratic Senators released their own framework for crypto market structure legislation, including stricter Know-Your-Customer (KYC) and Anti-Money Laundering (AML) requirements for DeFi protocols. They're concerned that the DeFi space is being exploited for illicit financial activity.

Republican Position: Republican lawmakers argue that an overly restrictive framework would push innovation to other jurisdictions without improving user protection. Fact sheets from the Republican-controlled Banking Committee state: "Code is protected — misconduct is not."

Unexpected Supporters

Interestingly, not all crypto companies share Coinbase's position.

Ripple: CEO Brad Garlinghouse called CLARITY "a massive step forward in providing workable frameworks for crypto, while continuing to protect consumers."

Coin Center: Executive Director Peter Van Valkenburgh stated: "Coin Center's mission is to protect software developers and non-custodial, decentralized tools. Judged by that standard, we're optimistic about where the current market structure draft stands."

Digital Chamber: This crypto advocacy organization confirmed continued support for the bill while pushing for targeted improvements.

a16z, Circle, Kraken: Other major venture capital funds and crypto companies are also among supporters, indicating that while Coinbase focuses its criticism on certain aspects, a larger portion of the ecosystem recognizes the importance of establishing jurisdictional clarity between the SEC and CFTC.

Part V: SEC vs. CFTC: The Regulatory Turf War

Two Agencies, Two Philosophies

One of CLARITY's core objectives is to clearly delineate regulatory authority between the SEC and CFTC. However, this has become one of the most contentious points.

SEC: This agency has a history of enforcement-heavy approach toward the crypto industry, frequently suing companies for allegedly issuing unregistered securities. Many in the industry view the SEC as a hostile regulator.

CFTC: Conversely, the CFTC is seen as taking a more collaborative approach with the industry. The CFTC has long been viewed as the natural regulator for crypto spot markets, similar to how they oversee gold or wheat.

Erosion of CFTC Authority?

Brian Armstrong alleges that the Senate version of CLARITY has reversed the original intent. Instead of granting the CFTC "exclusive jurisdiction" as the House-passed version did, the new draft reportedly gives the SEC final say in determining whether a token falls under their oversight or the CFTC's.

This means the SEC would retain significant power in token classification, exactly what many crypto companies wanted to avoid.

Practical Concerns

A major practical question is whether the bill creates a realistic path for today's major crypto venues to become compliant without shutting down U.S. products.

Exchanges want clearer listing and oversight rules. Institutions want a definitional regime that doesn't shift midstream. Builders want to know whether a token can trade without every participant fearing retroactive securities claims.

Part VI: The Political Factor

Partisan Tensions

CLARITY's delay isn't just about technical or economic issues, it's also deeply influenced by political tensions.

Some Democrats argue that advancing crypto legislation could benefit businesses linked to President Donald Trump, including the Trump-branded memecoin, the World Liberty Financial project, and American Bitcoin, a mining company co-founded by Eric Trump and Donald Trump Jr.

Representative Maxine Waters was among the most vocal critics, calling the debate "crypto corruption" and stating: "These laws make Congress complicit in Trump's unprecedented crypto fraud."

Ethics Provisions

Another point of contention is conflict of interest provisions targeting the Trump administration. A letter from nonprofit watchdog groups to Chairman Tim Scott and Senator Elizabeth Warren described the lack of provisions in the proposed bill addressing governmental conflicts of interest as "deeply concerning."

Senator Tim Scott pushed back, telling CoinDesk that ethics provisions don't belong in the Clarity Act.

If Democrats like Ruben Gallego, who has referred to an ethics provision as a "red line" — pull their support, the bill could be stuck in committee, which needs a simple majority vote, though Republicans hold the edge.

Time Pressure

The crypto industry wants to see the bill passed before the 2026 midterm elections, in case some industry allies lose their seats in November and to avoid losing momentum on Capitol Hill.

Summer Mersinger, CEO of the Blockchain Association, emphasized: "We've seen this massive movement of companies and activity back onshore because there is a friendly administration to crypto. But if the bill doesn't advance by early February, it risks being 'shelved' as the 2026 midterm election cycle begins to dominate the legislative calendar."

Part VII: Lessons And The Road Ahead

Division Within the Industry

The CLARITY saga exposes an important truth: the crypto industry is not a unified bloc. Different companies have different priorities and business models, leading to different views on ideal regulation.

Coinbase, with a business model heavily dependent on stablecoin yields and ambitions in tokenized equities, has different concerns than Ripple,  a company that has battled the SEC for years and could benefit from any regulatory clarity.

Kraken, Coinbase's competitor, sided with supporting the bill. Co-CEO Arjun Sethi wrote: "Walking away now would not preserve the status quo in practice. It would lock in uncertainty and leave American companies operating under ambiguity while the rest of the world moves forward."

The Path Forward

Chairman Tim Scott remains optimistic that the bill will eventually pass. He told Fox News Digital before the vote was canceled: "President Trump and I have talked seriously about the importance of 2026 being the year of affordability. When you look at market structure, the legislation itself, the one thing we can understand is that this is a generational shift in the direction of affordability."

David Sacks, the White House "Crypto Czar," weighed in after the vote was postponed, saying the delay should be used by the industry to "resolve any remaining differences." He wrote: "Passage of market structure legislation remains as close as it's ever been. Now is the time to set the rules of the road and secure the future of this industry."

New Timeline

The Senate Banking Committee now plans to hold the CLARITY markup during the last week of January 2026, though specific dates may depend on congressional scheduling and negotiation progress.

The Senate Agriculture Committee, overseeing CFTC-related aspects, has also postponed its markup to coordinate with broader negotiations.

Conclusion: Lessons on the Complexity of Crypto Regulation

CLARITY Act's delay isn't the death knell for hopes of clear crypto regulation in the U.S., but it's a powerful reminder of the staggering complexity of this task.

Regulating digital assets isn't simply about deciding whether the SEC or CFTC should be responsible. It involves:

• A trillion-dollar competition between traditional banks and new fintech platforms
• A delicate balance between consumer protection and promoting innovation
• Tension between financial security and individual privacy
• Political battles between parties with different priorities
• The diversity of the industry itself, with companies having different business models and interests

Former CFTC Commissioner Jill Sommers observed: "Legislative delays often indicate active engagement with complex issues." She emphasized that comprehensive cryptocurrency regulation requires careful consideration of multiple factors.

Meanwhile, the world isn't standing still. Singapore, UAE, and Europe with its MiCA regulation are moving forward with their own stablecoin frameworks, positioning the U.S. to decide: lead or lag.

CLARITY Act may not be perfect, but its absence leaves the industry in a more precarious state. As one analyst remarked: "Everyone involved in the CLARITY Act is a parasite",  a bitter assessment reflecting the frustration of many in the industry.

The question is no longer whether the U.S. needs crypto regulation, but what kind of regulation, who will benefit, and who will pay the price. And until those questions are answered, uncertainty will remain the only certainty in the U.S. digital asset market.

This article was compiled and analyzed from reputable sources including Fox Business, Fortune, DL News, The Hill, CNBC, and official documents from the U.S. Congress.