CLARITY Act Fails: From Expectations to Broken Regulatory Battles, How Do Retail Investors Respond?

Early 2026 marks the harsh reality of failure to secure regulation becoming the most painful truth in the crypto industry. The much-anticipated CLARITY Act, which was once expected to bring clarity, ultimately turned into a battleground of competing interests at the last minute, with the promised clear rules collapsing before the Senate version. Originally intended to provide regulatory certainty, the bill instead became a symbol of regulatory failure—industry giants that once embraced the rules suddenly turned against them, and retail asset prospects changed dramatically.

The Root Cause of Regulatory Failure: The Dilemma of the Old Order in the Regulatory Gray Area

Before the CLARITY Act appeared, US crypto regulation was like uncharted territory.

The Civil War of Dual Hegemonies

SEC (Securities and Exchange Commission) wanted to regulate tokens as stocks, while CFTC (Commodity Futures Trading Commission) aimed to regulate tokens as commodities. Projects caught in the middle never knew which regulator would knock on their door tomorrow. This uncertainty even led to a terrifying “regulation by litigation” scenario—SEC would sue first, then set rules later.

The Ripple case is a prime example. The lawsuit has lasted over three years, directly impacting XRP’s market cap fluctuations worth hundreds of billions of dollars, casting a shadow over the entire industry. Many talents and funds have flowed out to Singapore, Europe, and other regions.

Banks’ Anxiety and Efforts to Protect

Meanwhile, traditional financial institutions felt threatened. Stablecoins offering an average annual yield of 4.2%, far above bank savings rates, led to potential monthly deposit outflows exceeding $20 billion. To protect their “pocketbooks,” banking lobbies began pushing for a strict crypto legal framework.

Against this backdrop, the CLARITY Act was born. It aimed to:

• Clarify regulatory authorities: Decentralized assets (like Bitcoin) under CFTC, early-stage financing assets under SEC
• Integrate stablecoin frameworks: Define issuance and reserve requirements for stablecoins

This was a promising promise—giving the market a “predictable future.” As a result, Coinbase, Ripple, Kraken, and others initially publicly supported CLARITY.

Until the Senate version emerged.

The Collapse of Regulatory Commitments: Why Coinbase Suddenly Turned Against and Regulatory Failure Became Reality

In January 2026, the revised Senate version of the CLARITY Act was unveiled, and the tone shifted dramatically. The previously promised clarity of rules failed.

Dark Provisions in the Senate Version

The new version introduced extremely harsh restrictions:

1. Tokenization Ban: Restricts direct tokenization and trading of traditional financial assets like US stocks and bonds on public blockchains
2. RWA Exclusion: Clearly excludes real-world assets from digital commodities, subjecting them to strict securities law regulation
3. Stablecoin Rewards Ban: Prohibits exchanges from offering stablecoin holding rewards

These amendments directly angered industry leaders. Coinbase CEO Brian Armstrong publicly withdrew support, stating the amended bill was “worse than having no bill at all.”

The Business Calculus Behind Regulatory Failure

Coinbase’s opposition was not unfounded. It partners with Circle, allowing users holding USDC to earn about 3.5% rewards. This generates substantial revenue for Coinbase. Banning stablecoin rewards directly corresponds to an estimated annual revenue loss of around $1 billion.

But that’s only the surface. The deeper issue of regulatory failure lies in the fact that: on the surface, the bill appears to regulate crypto, but in reality, it’s protecting the traditional financial order.

Coinbase’s three core objections reveal the truth:

1. Ban on Stablecoin Rewards (Most direct conflict of interest) Traditional banking lobbies strongly pushed for this, as interest-bearing stablecoins are eating into their deposit base. Banning rewards is essentially saying: you cannot compete with banks.

2. De Facto Ban on Tokenized Stocks and RWA Coinbase has long been optimistic about tokenization’s future. But the new bill’s complex registration requirements effectively prohibit the free trading of tokenized stocks on crypto infrastructure. This kills the vision of “ordinary people buying 0.01 shares of Tesla.”

3. Regulatory Hell for DeFi The bill requires almost all DeFi protocols to register like banks, granting governments high authority to access transaction data. This not only invades privacy but is also technically unfeasible.

In simple terms: regulatory failure has occurred. The industry’s expectation of clear rules has not been met; instead, a regulatory framework hijacked by traditional finance has taken its place.

Chain Reaction of Regulatory Failure: The Fates of Retail Investors, Institutions, and Projects

The same bill spells very different stories for different participants.

Retail Investors: The Double-Edged Dilemma

Pros: The bill mandates CEXs to segregate customer funds with third-party custody, fundamentally preventing FTX-style disasters.

Cons: Regulatory failure means retail investors face double losses. First, losing the 3%-5% interest on stablecoins (if in a CLARITY jurisdiction). Second, the dream of fractional stock trading—buying 0.01 shares of Tesla on-chain—shattered.

Institutions: Compliance Boon vs. Regulatory Failure

For institutions, this is more like a long-awaited compliance ticket. Legal certainty is a prerequisite for giants like Goldman Sachs and BlackRock to enter.

Even if the bill’s version is imperfect, once the SEC and CFTC jurisdiction boundaries are clarified, billions of dollars in institutional funds will be compliantly allocated to digital commodities beyond Bitcoin and Ethereum, sparking a wave of spot ETF applications for altcoins. But the parts of the bill that fail regulation (like RWA restrictions) will delay institutional tokenization plans.

Projects: Joy and Sorrow

Projects classified as digital commodities will be free from SEC entanglements; those deemed securities face heavy compliance obligations.

It’s worth noting that the bill explicitly protects non-custodial developers. If you only write code, publish open-source protocols, and do not handle customer funds, you won’t be considered a Money Transmitter. This safeguards pure protocol-level innovation.

But the most severe blow of regulatory failure hits emerging projects relying on RWA and tokenization.

Industry Split: Break in Consensus or Strategic Patience?

The regulatory failure has sparked fierce debate within the industry. Supporters and opponents each have their arguments:

Strong Opponents

Coinbase CEO Brian Armstrong’s core view: If even in such crypto-friendly political environments, stablecoin yields cannot be included, then in more anti-crypto political cycles, it’s even less possible. It’s better to tear up the agreement and start over.

KOLs like AB Kuai.Dong, qinbafrank, Phyrex also pointed out that the Senate version favors traditional banks, is unfavorable to native crypto companies, and essentially legislates for banks rather than for innovation.

Strategic Supporters

Ripple CEO Brad Garlinghouse said: Although the current plan is imperfect, regulatory failure is not the end. Ripple is ready to push tokenization within the framework, viewing it as “a step forward.” Kraken co-CEO Arjun Sethi also warned: Giving up now will increase uncertainty and push innovation overseas.

This reflects a deep industry divide:

• Exchanges like Coinbase focus on trading profits; regulatory failure means immediate revenue loss
• Projects like Ripple value long-term regulatory clarity and are willing to tolerate short-term setbacks for legal certainty

Self-Help Guide for Retail Investors in the Face of Regulatory Failure: Three Strategies

This is a coming-of-age ceremony and a new beginning. For retail investors, understanding and adapting to the new rules after regulatory failure is key to safeguarding assets in the coming years.

Strategy 1: Reassess Asset Portfolio, Tilt Toward Digital Commodities

Adjust your holdings: increase allocation to assets clearly classified as “digital commodities” (Bitcoin, Ethereum, and blue-chip tokens in their ecosystems).

Why? Because after regulatory failure, assets under clear regulation are safer. These assets will first attract traditional institutional capital due to regulatory certainty, making spot ETFs easier to approve and providing strong price support.

Conversely, newly issued tokens likely to be classified as “securities” should be approached with extreme caution. They will face strict disclosure and fundraising restrictions, risking liquidity drying up.

Strategy 2: Reconfigure Stablecoin Strategies, Seek Alternative Yields

If you are in a CLARITY jurisdiction (e.g., US), regulatory failure means CEX-provided stablecoin rewards of 3%-5% may vanish. In this case:

1. Evaluate risk costs: shift some funds to non-custodial DeFi protocols
2. Seek alternative yields: despite increased DeFi regulation, protocols with strong censorship resistance may offer refuge
3. Diversify deployment: don’t keep all stablecoins on a single CEX

Strategy 3: Be Cautious with RWA Sector, Watch for Liquidity Traps

The Senate’s revised bill is extremely strict on RWA. Regulatory failure makes RWA most vulnerable—possibly banning RWA from CEX listings altogether.

Specific actions:

1. Assess existing RWA exposure: e.g., tokenized stocks or bonds—be alert to liquidity risks
2. Delay participation: before the bill settles, avoid high-compliance traditional finance tokenization projects
3. Monitor policy developments: regulatory failure may be temporary. Watch for amendments or exemptions

Regulatory failure is not the end but the start of a new game. In this process of利益撕裂 (interest tearing), the only certainty is that rules are changing, and the game is being reshaped. Retail investors’ success depends on how quickly they understand the new rules and find their survival space within the cracks of regulatory failure.