Catholic groups and law enforcement push back against key CLARITY Act provision on DeFi
The CLARITY Act, a major U.S. legislative effort to define the regulatory framework for digital assets, is facing growing resistance over one specific element: its treatment of non-custodial decentralized finance (DeFi). What was initially framed as a way to protect developers and support innovation is now under fire from both law enforcement organizations and a broad coalition of Catholic groups, who warn that the current draft could unintentionally shield criminal activity.
At the heart of the controversy is Section 604 of the Blockchain Regulatory Certainty Act (BRCA), which is incorporated into the wider CLARITY Act. This section aims to draw a clean line between builders of non‑custodial DeFi tools and traditional money transmitters. Under Section 604, developers of protocols and applications that never take control of user funds would not be required to obtain money transmitter licenses.
In simple terms, if a DeFi platform is designed so that users maintain direct control of their own assets, the developers would be exempt from the licensing rules that apply to exchanges, payment processors, or other custodial services. The goal is to give open‑source coders and protocol designers legal certainty, so they are not treated like banks for simply publishing code or running non‑custodial infrastructure.
The provision goes even further: it limits liability for developers when third parties use their platforms for illicit purposes. Under the current language, regulators and prosecutors would be expected to pursue the individuals actually committing fraud, money laundering, or sanctions violations, rather than blaming the developers who built the tools. This is a direct response to disputes like those seen in the Tornado Cash case, where authorities targeted developers of privacy‑focused protocols used by bad actors.
However, this approach has triggered a strong reaction from parts of the law enforcement community. On 24 June, four prominent U.S. law enforcement organizations issued a joint letter to the White House and the Department of Justice highlighting their concerns with Section 604. The signatories represent a significant share of the country’s criminal justice apparatus: 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. Altogether, these bodies speak for over 70,000 professionals involved in policing, prosecution, and public safety.
In their letter, these groups argue that the current wording of Section 604 risks opening serious gaps in oversight and accountability. They warn that broad exemptions for non‑custodial platforms could “impede” ongoing and future investigations involving digital assets. If investigators cannot meaningfully engage with the people who design and operate the tools used in criminal schemes, they fear their ability to trace funds, identify suspects, and dismantle networks will be weakened.
Importantly, the law enforcement organizations stress that they are not opposed to software developers as such. Their objection is not to innovation or to the idea that non‑custodial services should be treated differently from custodial ones. Instead, they focus on the breadth of the carve‑outs. In their view, the current draft could unintentionally provide a shield for sophisticated actors who deliberately design systems to facilitate crime while hiding behind the “non‑custodial” label.
The resistance is not limited to the criminal justice community. Around one hundred Catholic organizations and religious leaders have also come forward to oppose Section 604. Their criticism is framed less in technical regulatory language and more in terms of ethical and humanitarian risks. For these Catholic groups, the key worry is that looser obligations for DeFi developers might blunt the tools used to detect and combat some of the most serious abuses, including human trafficking.
They argue that Section 604, as written, could introduce wide carve‑outs and ambiguous responsibilities that make it harder to monitor financial flows tied to trafficking networks, organized crime, child exploitation, sanctions evasion, and other grave offenses. In their view, the bill, even if unintentionally, privileges technical innovation over the protection of vulnerable people. They fear that traffickers and abusers will increasingly exploit permissionless financial systems if oversight cannot keep pace.
This convergence of concerns-from prosecutors, police, sheriffs, and faith‑based organizations-is turning Section 604 into one of the most contentious elements of the entire CLARITY Act. What was once seen as a relatively narrow developer‑protection clause has become a focal point for a much broader debate about responsibility in decentralized systems. Lawmakers now face pressure from two powerful narratives: the need to preserve space for open innovation in DeFi, and the moral and security imperative to prevent financial technologies from serving as safe havens for criminal activity.
The growing controversy has practical consequences on Capitol Hill. Alongside separate debates over ethical safeguards and questions around yields on stablecoins, the dispute over Section 604 has contributed to delays in moving the CLARITY Act toward a full Senate floor vote. Each additional criticism forces sponsors and committee members to consider whether the bill’s language should be tightened, clarified, or substantially revised before it can gather the bipartisan support needed to become law.
At the same time, other crypto‑related policy battles continue in parallel. In the tax arena, an amendment proposed by Representative Steven Horsford of Nevada seeks to cap tax deferrals on income from staking and mining at a maximum of five years. The idea is to prevent indefinite postponement of taxable events in areas where the rules have long been murky. Yet industry advocates, including figures from the Solana Policy Institute such as Kristin Smith, argue that this amendment misses the mark. They contend that it could discourage network participation and undermine long‑term infrastructure growth by creating additional tax uncertainty rather than resolving it.
Despite recent progress in areas like stablecoin legislation-where the passage of the GENIUS Act is viewed by many industry participants as a positive step toward clearer rules-core questions about the overall market structure and tax treatment of crypto assets remain unresolved. The CLARITY Act is supposed to address several of these open issues, but the backlash against Section 604 underlines how difficult it is to write rules that simultaneously support innovation, maintain public safety, and satisfy ethical concerns.
The debate around Section 604 also exposes a deeper philosophical divide over how responsibility should be allocated in decentralized systems. Supporters of the provision argue that code is a form of speech and that punishing developers for how others use open‑source tools will stifle innovation and push talent offshore. They emphasize that in a non‑custodial design, developers do not hold or move user funds and therefore should not be treated like financial intermediaries.
Opponents counter that the line between “developer” and “operator” can be blurry in practice. They point to situations where teams exercise substantial influence over protocol governance, front‑end interfaces, or upgrades, even while claiming to be fully decentralized. If such actors are categorically exempt from licensing or liability, critics worry that it becomes easier to design systems that deliberately avoid oversight while continuing to profit indirectly from illicit activity.
There is also a technical dimension to the concern. Investigators often rely on cooperation from service providers to follow the money in digital asset cases. Even without custody, developers or entities associated with a protocol may control key infrastructure, such as user interfaces, analytics tools, or off‑chain services that support the on‑chain system. Law enforcement groups fear that if these actors can point to a broad statutory exemption, their willingness to assist investigations-or the legal grounds to compel their help-could be diminished.
From the perspective of Catholic organizations and other advocacy groups focused on human rights, the central question is whether the bill adequately anticipates how bad actors adapt. They note that traffickers and organized crime networks have historically migrated to whatever financial channels offer the least resistance: from cash smuggling and shell companies to prepaid cards and now, increasingly, digital assets. A legal framework that appears to remove potential chokepoints in the DeFi ecosystem is therefore viewed with suspicion, especially when the victims are often invisible and already underserved by existing systems.
For lawmakers trying to move the CLARITY Act forward, the challenge will be to reconcile these competing concerns. One possible path is to refine the definition of “non‑custodial” and introduce more nuanced thresholds for when an entity is truly passive versus when it effectively operates a financial service. Another option could be to retain protections for genuine open‑source developers while specifying limited, narrowly tailored obligations to assist law enforcement in cases involving serious crimes like trafficking or terrorism financing.
The outcome of this debate will have implications far beyond a single bill. How Section 604 is ultimately shaped-or whether it survives at all-will send a strong signal about the United States’ regulatory stance on DeFi. A version that is seen as too permissive may provoke further backlash from public interest groups and international partners concerned about illicit finance. A version that is seen as too restrictive may drive DeFi innovation to other jurisdictions and weaken the country’s role in shaping global standards.
For the crypto industry, the current moment is a reminder that regulatory clarity comes with trade‑offs. Legal certainty for developers can enhance investment and accelerate innovation, but it must be weighed against the expectations of law enforcement, faith‑based leaders, and the wider public that new technologies will not make it easier for criminals to hide. The growing coalition against Section 604 underscores that the debate over responsibility in DeFi is not merely technical-it is also social, ethical, and political.
As discussions continue behind closed doors and in public hearings, one thing is clear: the future of the CLARITY Act will hinge not just on abstract principles of innovation and freedom, but on whether lawmakers can convince skeptics that safeguards against exploitation and abuse are robust enough. Until that balance is struck, Section 604 will remain a flashpoint in the broader struggle to define the rules of the emerging digital financial system.