Wall Street’s Secret Plan to Take Over Crypto

As the Senate Banking Committee prepares for the January 15 markup of HR 3633, widely known as the Clarity Act, the cryptocurrency industry stands at a critical juncture that could fundamentally alter the structure of digital finance. While market sentiment has been buoyed by the prospect of regulatory legitimacy in early 2026, a closer examination of the bill suggests it may inadvertently dismantle the core tenets of decentralized finance (DeFi) while entrenching traditional banking institutions as the dominant gatekeepers of the asset class.

Key Points

• Senate Markup Scheduled: The Senate Banking Committee is set to review HR 3633 on January 15, a pivotal step toward passing the Clarity Act.
• DeFi Under Siege: New definitions for "digital commodity brokers" could force decentralized front-ends to implement strict Know Your Customer (KYC) protocols or face non-compliance.
• Banking Entry: The legislation overrides SEC Staff Accounting Bulletin 121 (SAB 121), clearing the way for major banks like BNY Mellon and State Street to monopolize crypto custody.
• Stablecoin Yield Ban: Under the associated "Genius Act," issuers are prohibited from passing yield revenue to users, effectively consolidating profits with issuers and banks.
• Global Surveillance Alignment: The U.S. framework is aligning with the EU’s MiCA regulation, increasing pressure on privacy coins and non-compliant protocols.

The Fine Print of Regulatory "Clarity"

The narrative driving the current crypto market rally is one of institutional acceptance and the end of hostile enforcement actions. With a pro-crypto administration in the White House and new SEC leadership promising to end the "war on crypto," the Clarity Act is being hailed as the green light for mass adoption. However, legal analysts reviewing the text of HR 3633 argue that the price of this clarity is the erosion of permissionless finance.

The core contention lies in Section 406, which creates a new registration category: Digital Commodity Brokers. While this provides a clear compliance path for centralized exchanges like Coinbase or Kraken, the language becomes problematic when applied to DeFi. Despite political assurances that software code will not be regulated, the bill’s provisions suggest that operators of DeFi front-ends—the web interfaces users employ to interact with protocols like Uniswap or Aave—could be classified as registrants.

Crucially, if a Decentralized Autonomous Organization (DAO) votes to collect fees to sustain a protocol, that DAO could be legally categorized as a broker. This designation triggers mandatory customer information collection requirements.

"If this provision passes as currently written in the Senate markup, it effectively kills the idea of permissionless finance in the United States... Imagine trying to swap tokens on a decentralized exchange. But before you can connect your wallet, a popup asks for your passport, your social security number, and a facial scan. That is not DeFi. That is just a bank with a different database."

This regulatory shift presents a binary choice for the industry: utilize fully regulated, KYC-compliant front-ends owned by corporations, or interact directly with smart contracts via command-line interfaces—a technical barrier that excludes the vast majority of retail users.

Institutional Custody and the Stablecoin Monopoly

Beyond the restrictions on DeFi, the legislation appears structured to facilitate a transfer of market dominance from crypto-native firms to Wall Street incumbents. For years, banks were effectively barred from holding crypto assets due to SAB 121, which required custodians to hold equal amounts of cash on their balance sheets to offset crypto risks. The Clarity Act explicitly overrides this rule.

This regulatory change is expected to act as a "starter pistol" for major financial institutions such as BNY Mellon, Citi, and State Street, which have been building custody infrastructure in anticipation of this shift. By establishing a "qualified digital asset custodian" requirement, the bill incentivizes institutional capital—including pension funds and ETFs—to move away from self-custody and into traditional banking vaults.

The Impact of the "Genius Act"

Operating in tandem with the Clarity Act is the "Genius Act," signed into law in July 2025. While framed as a tool for innovation, the law regulates payment stablecoins in a manner that favors large issuers while disadvantaging users. The law mandates that issuers exceeding $10 billion must transition to federal oversight, solidifying the market position of giants like Circle.

Most significantly for retail investors, the law includes a ban on interest payments. In a high-interest-rate environment where issuers earn billions on the Treasury bills backing stablecoins, they are legally forbidden from sharing that yield with token holders.

"It's a wealth transfer from the user to the institutions codified into federal law... Tether made more profit than BlackRock last year. Under the Genius Act, they are legally forbidden from sharing that yield with you. So, who keeps the profit? The issuers, the banks."

Furthermore, by treating issuers as financial institutions under the Bank Secrecy Act, the legislation effectively transforms regulated stablecoins into surveillance tools, tracking transaction data in a manner similar to a Central Bank Digital Currency (CBDC).

Global Implications and the Future of Privacy

The legislative moves in the U.S. are not happening in isolation. They mirror the European Union's Markets in Crypto-Assets (MiCA) regulation, which is fully effective as of January 2026. This transatlantic alignment is creating a global regulatory net that bifurcates the market into "clean," compliant crypto and "dark," non-compliant assets.

The consequences are already visible in the privacy sector. Major exchanges are delisting privacy-centric assets like Monero and Zcash to comply with new transparency rules. Because the Clarity Act applies the Bank Secrecy Act to brokers, and compliance is impossible without identifying the counterparty, privacy on regulated platforms is effectively outlawed.

As the January 15 markup approaches, the industry faces a paradox: the legislation that promises to legitimize cryptocurrency may simultaneously strip it of its distinguishing characteristics—privacy, decentralization, and self-custody. While institutional inflows may drive asset prices higher, the structural changes ensure that the governance and profitability of the ecosystem increasingly reside with the traditional financial sector.