U.S. agencies are racing to substitute their regulations for the law that was meant to set crypto markets in governmental bedrock, but will the stand-ins last?

• It didn't take long for the U.S. markets regulators to try to fill in for a failed Clarity Act, though the efforts at the Securities and Exchange Commission and Commodity Futures Trading Commission may not be a perfect substitute.
• SEC Chairman Paul Atkins has said himself — a lot — that his agency needed a law to back up its work, and it didn't get one.

OK, the Clarity Act is dead (at least for now). Most crypto enthusiasts had a sense that this was a big bummer for the sector. But how many knew what the legislation actually did?

The Digital Asset Market Clarity Act was Congress' umpteenth version of a similar concept that's made the rounds for years: to define the different kinds of cryptocurrencies and related assets, and say exactly which regulators have power over them.

For much of the industry's history in the U.S., it battled with agencies such as the U.S. Securities and Exchange Commission over what platforms like Coinbase and Kraken were allowed to do and whether issuing crypto was legally the same as launching a security. It got heated, and there were a lot of enforcement actions, expensive settlements and drama, much of it starring former SEC Chair Gary Gensler. (Pausing for crypto insiders to boo and hiss.)

The Clarity Act would have cleared that up and also elevated the SEC's sister agency, the Commodity Futures Trading Commission, to new authorities — most importantly full supervisory powers over the crypto commodity spot markets. Spot markets are where commodities trade directly, and since bitcoin

This conflict is uniquely American, because the U.S.' regulatory regime developed completely separate securities and derivatives agencies, unlike the unification elsewhere. (Yes, everybody knows it's unnecessarily complicated.) So figuring out which one is responsible for each asset has been a minefield from day one.

Defining the different buckets of blockchain-native assets and who would regulate them was a core aspect of Clarity. Plus, the bill did a lot of things meant to curb illicit finance. And — in a particularly contentious arena — it sought to offer limited legal protections to software developers in decentralized finance (DeFi), so they wouldn't get prosecuted for how other people use their work.

We'll pass on talking about the sections that actually killed the bill, which had very little to do with the legislation's primary business. Instead, we'll look at what happens in the Clarity-shaped hole in U.S. policy. And thanks to the SEC, we didn't have to wait long.

The industry isn't entirely back to square one after Clarity tanked. Exhibit A: the SEC. The securities watchdog is run by a guy hand-picked by crypto booster President Donald Trump, and SEC Chairman Paul Atkins started his tenure with digital assets rules top of mind. Now that Clarity fizzled, he sees a responsibility for building out what he can to replace it.

Before the paramedics had time to double check Clarity's pulse, Atkins pushed forward two days later with a major policy initiative to establish a legitimate space in U.S. regulations for tokenizing securities — a centerpiece of the SEC's new crypto focus. But that was neither the beginning nor end of his agenda.

He and the CFTC chairman — a former crypto-focused official at Atkins' SEC, Mike Selig — had already embarked on a joint digital assets campaign and started with a set of standards for how different assets would be treated, known as a "taxonomy." It was among a number of staff-level policy projects that have provided some clarity for the industry, though the efforts aren't terribly sturdy, because they could easily be overwritten by new management at the agencies.

Atkins also started on several more formal initiatives:

• The agency pitched its first major rule on crypto last month, which would set up Regulation Crypto Assets — a regime for raising funds on crypto offerings without setting off regulatory demands.
• Last week, the SEC proposed a technical but important rule that would allow blockchain data to officially serve as an ownership record.
• The agency is also close to pursuing a proposed rule on how investment advisers should keep custody of digital assets.

As Capital Alpha policy analyst Ian Katz put it, the SEC and CFTC are now able to "shift into overdrive with aggressive, pro-industry proposals."

"The Republican leadership at those agencies will be able to pass regulations without Democratic approval," he wrote in a note to clients after Clarity failed. "Some of those proposals may come with an implied message to Democrats amounting to: This is what you get when you don’t legislate."

The SEC's formal crypto rules — driven by an all-Republican commission in which the White House has left two Democratic vacancies — would take quite a bit of effort to reverse under a new leadership (a commission appointed by a future Democratic president, to be specific), though they're not as durable as if they'd been set in law. That most recent high-profile move from the agency on tokenization is meant to act as a practice run that helps guide a future, harder-to-erase policy — or even the next iteration of the Clarity Act, Atkins said.

Exhibit B for policy progress in Clarity's absence is the CFTC, the smaller kin of the securities watchdog. Chairman Mike Selig also embraced the post-Clarity vacuum to get to work on crypto rulemaking, sending a proposal on crypto transactions and markets for White House review on Friday.

The CFTC — where Selig is the only current member of a five-member commission, so has been able to act unilaterally — already started in on rules for the crypto sector's close cousin, the prediction markets. But it's so far still working on crypto policy, though it recently opened the door to crypto perpetual futures, or "perps."

Selig has said his staff is working on being able to affix a "crypto asset market" label on firms akin to the CFTC's current category of designated contract markets (DCMs).

So, the SEC and CFTC have a lot of projects underway to make a piecemeal version of what Clarity would have established. Much of them will be on slippery footing and may not give the industry the sense of stability it's hoping for. And the measures could be more vulnerable to legal challenges that rules are not based in law, which could further hold up progress if courts have to weigh in.

In short, there's a reason Atkins kept saying for months that the Clarity Act was necessary. As he put it in August, "Legislation remains indispensable to enacting 'future-proofed' rules of the road that are durable enough to protect the work we are undertaking today from being unwound by a future rogue regulator."

"Rogue" may be in the eyes of the beholder, but despite Atkins' enthusiasm in forging ahead with rules now (based on what he holds as existing SEC authorities), he's been insistent about his rhetorical reservations. "Indispensible," he'd said of Congress.

In speeches earlier this year and last year, he made substantially similar future-proof declarations: "Only Congress can future-proof regulation in this space."

But he's also repeatedly said his agency can be an important ally to that legislative work.

"What I envision aligns with legislation currently being considered by Congress and aims to complement, not replace, Congress’s critical work," he said when he launched his Project Crypto in November. However, the project — for now — stands alone.

Read More: Inside the last-minute political breakdown that doomed the Clarity Act vote

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