The CLARITY Act is facing new criticism from U.S. law enforcement groups and anti-human trafficking organizations as lawmakers prepare for a House hearing on the bill scheduled for July 17.
Several major law enforcement organizations have warned that a key section of the legislation could make it harder to track illegal activity involving cryptocurrencies and decentralized finance (DeFi) platforms.
In a letter sent to federal officials, the groups argued that Section 604 of the bill could create regulatory gaps, weaken anti-money laundering protections, and make financial investigations more difficult. The letter was signed by 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.
The organizations stressed that they are not opposed to technological innovation or software development. However, they believe some of the proposed exemptions could reduce oversight and make it easier for bad actors to move funds without proper monitoring.
At the center of the debate is Section 604, which is designed to protect certain non-custodial participants in the crypto industry. The provision would prevent software developers, open-source contributors, self-custody wallet providers, and some DeFi infrastructure operators from automatically being treated as money transmitters if they do not control customer funds.
Supporters of the bill say critics have misunderstood the proposal. Crypto industry advocates argue that the measure simply protects software developers who do not hold or manage customer assets. They say it does not prevent authorities from pursuing cases involving money laundering, fraud, sanctions violations, terrorism financing, or other crimes.
One of the bill’s strongest supporters, Senator Cynthia Lummis, has defended the legislation, saying clear regulations would help law enforcement by reducing legal uncertainty and closing loopholes that criminals can exploit. She has also argued that writing software code should not be treated as operating a money transmission business.
Concerns have also been raised by the Alliance to End Human Trafficking. The organization sent a separate letter to Senate leaders, warning that the same provision could make it more difficult to track financial activity linked to human trafficking, organized crime, child exploitation, and sanctions evasion.
The group said that any financial system should be judged not only by its ability to support innovation but also by its ability to protect people from harm.
The growing debate highlights the challenge lawmakers face as they try to balance innovation in the digital asset industry with strong consumer protections and law enforcement oversight.
While supporters believe the CLARITY Act could provide long-needed regulatory certainty for the crypto industry, critics are calling for changes to ensure that anti-money laundering safeguards and investigative tools remain fully intact.
For now, discussions continue, and lawmakers have not yet scheduled a final vote on the legislation.
