Citi: CLARITY Act Progress Slows as DeFi Debate Becomes Major Obstacle

TLDR

• Citi identified the CLARITY Act as crucial for legitimizing digital assets in the U.S. but highlighted delays due to contentious provisions.
• The DeFi debate over defining decentralized protocols and software regulation is the main obstacle to progressing the bill.
• Citi warned that overly strict regulations on DeFi could stifle Web3 development and innovation in decentralized finance applications.
• The bank proposed alternatives for stablecoin reward structures, including time-limited yield models to address regulatory concerns.
• Despite disagreements, Citi remains optimistic about the long-term potential of stablecoins in cross-border and business-to-business transactions.

Citi has identified the CLARITY Act as the primary legislative driver for digital asset legitimacy in the United States, though contentious issues continue to stall its path, particularly within the Senate Banking Committee, leaving the bill’s passage timeline uncertain.

DeFi Provisions Present the Biggest Hurdle

Citi emphasized that decentralized finance, or DeFi, remains the most complex area in the ongoing legislative debate.

The analysts highlighted that lawmakers are debating how and when decentralized protocols qualify as regulated service providers. This definition is key to determining if developers or software operators must comply with surveillance or custody rules.

According to the report, “An overly restrictive framework could weigh on Web3 development and stifle growth across decentralized exchanges and derivatives.” Citi warned that the debate centers on how far neutrality for open-source software should extend in regulation.

The analysts suggested that custody and surveillance requirements could form the core of a compromise rather than strict rules on code deployment. They added that too much regulatory pressure may hurt innovation across Layer-2 networks and stablecoin yield protocols.

Citi said this impasse over DeFi could extend negotiations well beyond 2026, delaying progress on broader crypto market reform. However, lawmakers are still expected to keep working, even in the event of a government shutdown.

Stablecoins and Tokenization Receive Mixed Responses

The bank’s report also examined how stablecoin reward structures might evolve under the current legislative process.

Citi proposed alternatives like time-limited yield or revised incentive models to balance innovation and regulatory concerns. While banks warned of arbitrage risks, crypto companies defended rewards as essential for adoption and growth.

Analysts noted that despite the reward debate, Citi remains confident about long-term business-to-business and cross-border stablecoin applications. These use cases are less affected by domestic incentive structures, they added.

In a separate section, the report addressed growing resistance to tokenized equities due to fears of bypassing traditional infrastructure. Citi said regulators could explore hybrid settlement systems and maintain existing distribution rails.

They also recommended labeling equity tokens as securities and piloting solutions under the SEC to address concerns. These steps may help preserve existing market processes while enabling innovation.

Committees Divide Control as Timelines Remain Unclear

Citi acknowledged that although the Senate Agriculture Committee has moved its version of the CLARITY Act forward, major obstacles remain.

The Senate Banking Committee still holds authority over the bill’s most debated provisions. These include how digital assets are classified and which body regulates them.

Progress continues, yet the bank warned that unresolved issues could delay final passage beyond 2026. Lawmakers are working through these disputes in parallel with other legislative activity.

Peter Christiansen, who led the report, stated, “We see the passage of the CLARITY Act as the essential catalyst for advancing/legitimizing digital assets.”

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