Clarifying the CLARITY Act Arnold & Porter's legal analysis examining the practical implications of the CLARITY Act for digital asset businesses, token classification methodologies, and regulatory compliance strategies.
August 2025
Source: Arnold & Porter

What Does Arnold & Porter's Analysis Cover?

Arnold & Porter provides detailed legal analysis of the CLARITY Act's practical implications. The firm examines how the statutory language translates into actionable compliance guidance, focusing on the classification test, decentralization criteria, and registration requirements.

The analysis is particularly valuable for its examination of edge cases and interpretive questions that will likely arise as the Act is implemented.

How Does the Classification Test Work in Practice?

Arnold & Porter breaks down the functional test for determining whether a digital asset is a security or commodity:

Security Indicators

  • Centralized development team or foundation controls key decisions
  • Token holders have profit expectations from issuer's efforts
  • Marketing emphasizes investment potential or returns
  • Issuer retains significant token holdings or control
  • Network functionality depends on continued issuer involvement

Commodity Indicators

  • Decentralized governance with distributed decision-making
  • Token has functional utility independent of price appreciation
  • Network operates autonomously without issuer involvement
  • Open-source development with multiple contributors
  • No single party controls majority of tokens or nodes

Gray Areas

  • Tokens with both utility and investment characteristics
  • Projects with formal decentralization but practical centralization
  • Governance tokens for otherwise decentralized protocols
  • Layer 2 and infrastructure tokens

What Constitutes "Sufficient Decentralization"?

Arnold & Porter analyzes the Act's decentralization criteria:

Technical Decentralization

  • No single entity controls network validation or consensus
  • Open-source code with public development process
  • Multiple independent node operators
  • Resistance to single points of failure or control

Economic Decentralization

  • No single party holds majority of circulating tokens
  • Broad distribution among unaffiliated holders
  • Liquid secondary markets
  • No preferential access to tokens or rewards

Governance Decentralization

  • Meaningful community participation in decisions
  • No veto power retained by founders or insiders
  • Transparent governance processes
  • Ability to fork or exit without permission

What Are the Registration Pathways?

For Digital Asset Securities

  • Traditional SEC registration (Form S-1 or equivalent)
  • Regulation A+ for smaller offerings
  • Regulation D for accredited investor offerings
  • New digital asset-specific registration forms expected

For Digital Commodities

  • CFTC registration for derivatives exchanges
  • Spot market registration requirements
  • Commodity certification process
  • Ongoing reporting obligations

For Trading Platforms

  • Dual registration may be required for multi-asset platforms
  • Customer protection requirements from both regimes
  • AML/CFT compliance across all activities
  • State-level requirements may also apply

How Do the Safe Harbors Operate?

Development Safe Harbor

  • 3-year period from token generation event
  • Must demonstrate good faith toward decentralization
  • Semi-annual progress reports required
  • Cannot be used for pure fundraising without development
  • Exit requires either registration or commodity certification

Conditions and Limitations

  • Anti-fraud provisions still apply during safe harbor
  • AML/CFT requirements remain in effect
  • Must disclose safe harbor status to token purchasers
  • SEC retains authority to revoke for bad faith

Strategic Considerations

  • Safe harbor is not a license to avoid all regulation
  • Projects should plan for post-safe harbor compliance
  • Documentation of decentralization efforts is critical
  • Legal counsel should be involved throughout

What Practical Guidance Does Arnold & Porter Offer?

For Token Issuers

  • Conduct classification analysis before launch
  • Document decentralization plan and milestones
  • Consider safe harbor eligibility and requirements
  • Prepare for eventual registration or certification

For Trading Platforms

  • Assess each listed asset for classification
  • Determine primary and secondary regulator(s)
  • Implement appropriate customer protections
  • Build compliance infrastructure for both SEC and CFTC

For Institutional Investors

  • Understand classification of assets in portfolio
  • Ensure custodians meet applicable requirements
  • Consider regulatory status in investment policies
  • Monitor safe harbor status of development-stage tokens

What Should Financial Institutions Consider?

Due Diligence

  • Classification analysis for each digital asset
  • Decentralization assessment for commodity tokens
  • Safe harbor status and timeline review
  • Regulatory registration verification

Compliance Infrastructure

  • Systems for tracking asset classification
  • Customer disclosure mechanisms
  • Regulatory reporting capabilities
  • Coordination with multiple regulators

The Coinbax Perspective

Arnold & Porter's analysis highlights a critical insight: the CLARITY Act provides a framework, not a checklist. Classification requires substantive analysis of each token's characteristics, governance, and economic structure.

For financial institutions, this means building analytical capabilities—not just compliance checklists. Understanding whether a token is a security or commodity requires ongoing assessment as projects evolve and decentralize over time.

The safe harbor provisions are double-edged: they provide breathing room for legitimate development projects, but they also require documented progress and good faith efforts. Institutions dealing with safe harbor tokens need to monitor these projects actively.

Frequently Asked Questions

How do I know if a token is a security or commodity?

Apply the functional test: assess centralization of control, economic expectations, and utility characteristics. Tokens with centralized issuers and investment expectations are likely securities; decentralized tokens with functional utility are likely commodities.

Can a token change classification over time?

Yes. The CLARITY Act recognizes that projects can decentralize over time. A token that starts as a security can become a commodity if it achieves sufficient decentralization, subject to a certification process.

What if a token doesn't clearly fit either category?

The Act provides for SEC/CFTC consultation on borderline cases. Market participants can seek guidance through no-action letters or formal interpretation requests.

How does the safe harbor affect token valuation?

Tokens in safe harbor carry regulatory uncertainty risk—they must eventually register as securities or certify as commodities. Investors should factor the safe harbor timeline and decentralization progress into valuation analysis.