5 Corruption Loopholes Congress Needs to Address in the Clarity Act

The most significant cryptocurrency legislation globally is advancing in the U.S. Senate. As currently drafted, it leaves the United States vulnerable to money laundering, evasion of sanctions, and high-level conflicts of interest, according to Greytak.

The Digital Asset Market Clarity Act, which passed through the Senate Banking Committee on May 14, aims to establish regulations for an industry that has outpaced the laws intended to regulate it.

There is widespread consensus that crypto regulation is overdue. However, as the bill approaches a Senate floor vote, it presents five loopholes that could compromise the very framework and stability the legislation aims to achieve.

The Decentralized Finance or “DeFi” loophole

A platform or intermediary that transfers, exchanges, hides, or otherwise facilitates value should not evade oversight merely by labeling itself as “decentralized.” North Korean hackers have repeatedly taken advantage of mixers and other virtual asset laundering mechanisms to transfer stolen cryptocurrency and finance the regime’s armament initiatives. The Treasury has determined that Tornado Cash was utilized to launder over $455 million pilfered by the Lazarus Group, and U.N. experts have indicated that North Korea subsequently laundered an additional $147.5 million through the same service. These blind spots are precisely what Congress must address: when a digital asset platform or intermediary engages in financial activities, it should be subject to relevant anti-money laundering and sanctions regulations.

The so-called “Tornado Cash” loophole

Certain crypto tools are designed to operate automatically, even when it becomes evident they are being used for money laundering. When anti-money laundering regulations apply to a person but vanish the moment software performs the same function, the outcome is not a safeguard — it is a legal loophole. The urgency of this issue is not hypothetical. In May, FinCEN alerted U.S. banks that Iran’s Islamic Revolutionary Guard Corps had established a multi-jurisdictional shadow banking network — integrating digital asset infrastructure with front companies and exchange houses — to launder oil revenues and finance arms procurement and terrorism. Congress should grant the Treasury Department’s Office of Foreign Assets Control (OFAC) the explicit authority it needs to take action against anonymizing tools employed to circumvent sanctions.

The stablecoin loophole

The GENIUS Act, enacted earlier this year, set the foundational framework for stablecoin issuers, but permitted illicit actors to bypass that framework through DeFi protocols, offshore platforms, mixers, or other services that transfer stablecoins without sufficient controls. Sanctioned Russian entities have already utilized stablecoins, including through platforms that impose no identity verification requirements, to transfer funds and maintain financial networks. The Clarity Act should mandate stablecoin issuers to implement reasonable ecosystem-wide monitoring to identify and report suspicious activities. Without that comprehensive oversight, stablecoins risk becoming the preferred channel for sanctions evasion, fraud, ransomware, trafficking, and money laundering associated with corruption.

The jurisdictional loophole

A platform catering to American customers or routing transactions through the U.S. financial system should not be able to evade its anti-money laundering and sanctions responsibilities simply by registering its headquarters overseas. The Justice Department recently charged a Venezuelan national with allegedly laundering around $1 billion through a network that utilized bank accounts, cryptocurrency exchange accounts, private wallets, shell companies, and transactions to and from the United States. Such cross-border transactions are precisely what slip through the gaps when platforms can choose the jurisdiction with the least scrutiny. If a platform or intermediary facilitates illicit financial activities, it should be severed from the legitimate financial system.

The ethics and conflict of interest loophole

Just four days before the 2025 inauguration, a member of President Trump’s immediate family reportedly signed a deal to sell a 49% share in their crypto venture, World Liberty Financial, to an Abu Dhabi-backed entity for half a billion dollars. According to The Wall Street Journal, the Trump Administration subsequently approved granting the UAE access to 500,000 of the world’s most advanced AI chips, overcoming longstanding national security concerns. The Clarity Act is now progressing under an administration whose family has direct financial interests in the very digital asset ventures that the bill aims to regulate. No unbiased crypto framework can be established on such a foundation. The Clarity Act must prohibit public officials and their immediate family members from owning, promoting, sponsoring, endorsing, or soliciting investments in digital asset ventures while the official is in office.

These five gaps are not merely theoretical issues. Each one corresponds to a current activity: sanctioned nations transferring money, foreign officials laundering bribes, adversarial actors financing arms programs, and a sitting president’s family selling interests in the industry that the legislation seeks to regulate. Congress has the chance to enact rules that safeguard the integrity of the U.S. financial system. It also has the opportunity to create regulations that subtly enable those who would exploit it. The version of the Clarity Act currently advancing toward the Senate floor does not adequately differentiate between the two.

The decision facing the Senate is not whether to regulate crypto. It is whether the rules crafted by Congress will be robust enough to fulfill the purpose of regulation: to protect consumers, uphold U.S. national security, and ensure that public office cannot be leveraged for personal or familial gain. Five gaps separate this bill from that standard. They can and must be addressed.

Note: The views expressed in this column are those of the author and do not necessarily reflect those of Decryptnews, Inc. or its owners and affiliates.