January markup isn’t the finish line — the CLARITY Act still leaves DeFi rules dangerously vague, risking a collapse of retail protections

January markup announced — why this is not a resolution and the real risk for retail investors

Congress has set a January 2026 markup for the CLARITY Act. That sounds like progress, but the moment will not settle the debate — it will expose it. The draft brought to markup leaves large, consequential blanks where rules for decentralized finance should be, and those blanks can translate quickly into weaker legal protections for ordinary investors.

Put simply: a markup is a step in the law-making process, not the finish line. If negotiators fail to plug the gaps, retail protections that investors expect could erode overnight. That is the central risk: the law could create a framework that appears to clarify things on paper while quietly stripping or leaving undefined the rights and remedies that protect small account holders.

Which parts of DeFi the CLARITY Act leaves unwritten — the legal gaps that matter

Read the draft carefully and a pattern appears: key building blocks are undefined or handed to regulators without clear guardrails. That leaves market participants and courts to fill in the blanks — a slow, inconsistent process that breeds legal risk.

Here are the most important gaps.

• Token classification: The bill does not give a clear, operational test for which tokens are securities, commodities, or a new class. Without a bright-line standard, exchanges and issuers will face legal exposure every time they list or create a token.
• Custody rules: The draft leaves custody duties — who holds tokens and how — broadly defined. It does not clearly state whether custodians must operate like broker-dealers, bank custodians, or something else, nor does it specify consumer protections such as insurance or segregated holdings.
• DeFi protocols and intermediaries: Protocols that run automated markets and liquidity pools largely fall outside explicit definitions. The bill leaves it ambiguous whether code-driven contracts are service providers, market makers, or unregulated platforms.
• Exemptions and safe harbors: The law hints at carveouts for certain activities but does not define their scope. That uncertainty will invite litigation and inconsistent enforcement.
• Cross-border and unhosted wallets: The text fails to establish clear rules for interactions between U.S. actors and foreign services, or for transactions involving self-custody wallets that many retail investors use.

Each of these gaps doesn’t just create academic uncertainty. They touch on who can sue, who must hold client assets separately, and whether an exchange must disclose a market maker’s conflicts. Those are fundamental consumer protections.

What regulatory blank spots mean for prices, liquidity and custodians

When law leaves big questions unanswered, markets respond fast. Expect volatility, shifting liquidity, and a re-pricing of risk across exchanges, token issuers and DeFi protocols.

First, exchanges. Public and private exchanges will face a choice: pull tokens they fear are legally risky, or keep them and accept potential fines and lawsuits. That choice will show up as sudden delistings, lower trading volumes for borderline tokens, and wider bid-ask spreads. For exchanges that offer custody, vague custody rules will force them to either adopt costly, bank-style compliance or limit their services — a change that would push some retail customers toward less-protected venues.

Token issuers and DeFi projects will also feel it. Projects that cannot demonstrate a clear legal status may struggle to raise capital. Liquidity providers will demand higher compensation for risk, making borrowing and leverage more expensive. Stablecoins and lending protocols are particularly exposed: any legal ambiguity about whether a stablecoin is a security or about custody of reserves can trigger runs or sharp withdrawals.

For retail investors, the danger is practical. Unclear custody duties and token classification can mean fewer ways to recover assets in fraud cases, limited access to insurance or claims, and unpredictable customer protections. Even if prices rise on hype, the legal tail risk — the threat of retroactive enforcement or civil claims — will keep many long-term investors wary.

Players, politics and the path to — or away from — a final bill

This fight will play out in a narrow political arena. Prominent Republicans such as Sen. Tim Scott and Sen. John Boozman have pushed versions of the bill, and industry figures and advocates — including high-profile backers in the crypto world — are active in drafting and lobbying. Committee staff and a small number of senators will control the amendment process in January.

The key dynamics are brief and harsh: industry wants legal certainty and broad exemptions; many Republicans favor lighter regulatory touch to spur growth; some Democrats and consumer groups want stronger investor protections and clearer enforcement tools. That sets the stage for amendments that either plug the gaps or enlarge them.

Expect a bruising markup. The likely paths after January are limited: a narrowly worded markup that moves the bill forward with core ambiguities intact; a compromise that tightens definitions and custody rules; or a collapse where the bill gets held up and Congress punts. Which path wins will depend less on public hearings than on a handful of senators and lobbyists who can trade concessions on unrelated policy items.

Three plausible outcomes and what each would mean for retail protections

Look at three broad scenarios.

• Best case — targeted clarity: Lawmakers add precise definitions for tokens and custody, plus a consumer-protection floor. Outcome: exchanges can build robust custody products, liquidity returns, and retail protections remain largely intact. This is the most investor-friendly outcome.
• Compromise — patchwork clarity: The bill passes with some new language but leaves significant questions to future rulemaking. Outcome: short-term volatility and legal skirmishes continue, and companies hedge by limiting offerings. Retail protections weaken in practice because enforcement and remedies remain murky.
• Failure or hollow victory: The markup produces a bill that reads like clarity but defers substantive rules to regulators without guardrails. Outcome: a legal vacuum forms. Exchanges and custodians retreat from riskier products, and retail investors lose practical protections such as clear custody duties and easy paths to recovery.

For investors, that third outcome is the riskiest. It is not just a policy loss — it reshapes where retail capital can safely flow.

Watch list: dates, amendment language and market signals before January

Keep an eye on a few concrete things in the coming weeks.

• January markup schedule and any pre-markup staff memos — these reveal which clauses are up for amendment.
• Draft amendment texts that touch “definition of digital asset,” “custody exemptions,” and “safe harbor” language. Those lines will tell you whether retail protections are being strengthened or weakened.
• Signals from major U.S. exchanges — trading suspensions, voluntary delistings, or changes in custody offerings — which will be the fastest market reaction.
• Stablecoin reserve disclosures and flows. Sudden outflows or reserve opacity can presage market stress if legal status remains murky.
• Volume and volatility in tokens most likely to be affected by classification changes; watch spreads for signs that market makers are demanding a risk premium.

January will be loud and consequential. The markup can narrow the fight or open it wider. For investors and crypto policy watchers, the practical question is simple: will lawmakers fix the legal blanks, or will those blanks become the law of the land? If the latter happens, retail protections could weaken in ways that matter more than market headlines — and that would be bad for mainstream adoption.

Sources

• cryptoslate.com
• cryptoslate.com
• news.google.com
• cryptoslate.com
• cryptoslate.com
• cryptoslate.com