Removal of CLARITY Act’s Section 604 Could Spark First Amendment Battle, Industry Executives Warn

One year after the U.S. House passed the CLARITY Act to replace “regulation by enforcement” with clear rules, the bill remains stalled in the Senate due to banking opposition and partisan friction. Industry groups warn that stripping Section 604 will trigger First Amendment legal challenges and drive open-source developers out of the U.S.

“Developers need absolute confidence that publishing open-source code will not expose them to the same liabilities as operating a financial intermediary,” said Ivo Grigorov, CEO of Real Finance. “If that distinction becomes blurred, innovation will naturally migrate to jurisdictions offering greater legal certainty.”

Stefan Muehlbauer, head of U.S. government affairs at CertiK, noted that stripping Section 604 effectively conflates software development with financial services, potentially subjecting developers to the Bank Secrecy Act. Treating code writing as money transmission, Muehlbauer argued, invites a direct constitutional challenge. Decades of federal jurisprudence, backed by the U.S. Supreme Court, have established that computer source code is protected free speech under the First Amendment.

The CLARITY Act also addresses accounting standards, though it stops short of amending or overriding the controversial Staff Accounting Bulletin No. 121 (SAB 121). Instead, the bill acknowledges SAB 121’s prior rescission and prohibits the Securities and Exchange Commission from reimposing equivalent crypto-custody accounting requirements without undergoing a comprehensive notice-and-comment rulemaking process.

While this restriction removes a primary hurdle for institutional adoption, Muehlbauer cautioned that it does not entirely clear the runway for traditional bank custody.