James: Clarity Act would curb states’ crypto fraud power

New York Attorney General Letitia James filed written testimony Monday with the Senate Homeland and Governmental Affairs permanent subcommittee warning that the Digital Asset Market Clarity Act would limit states' ability to pursue crypto fraud and consumer-protection cases. She urged lawmakers to add tighter anti-money-laundering and ethics provisions to the bill.

James argued the proposal would preempt state investor-protection laws and remove enforcement tools that state and local prosecutors now use. In her submission she wrote, “The Digital Asset Market Clarity Act (‘CLARITY') seeks to interfere with and preempt states’ investor protection laws as well as dilute our ability to prosecute fraud.” She noted that most consumer-protection and fraud investigations are handled by state and local agencies.

Her testimony identified specific gaps in the bill's ethics language. The current text bars public officials and their spouses from issuing or sponsoring digital assets but does not cover other family members. The proposal also gives primary enforcement authority to the Justice Department and includes a sunset clause that would let the ethics restriction expire in January 2029. Democrats have pressed for stronger language to address financial ties related to World Liberty Financial and a memecoin linked to a political figure.

James asked Congress to expand the ethics restriction so federal officials and employees could not regulate industries from which they personally profit while in office and for at least one year after leaving office. She also sought mandatory cooperation from crypto intermediaries when law enforcement pursues crimes, and she recommended stronger know-your-customer and anti-money-laundering requirements for trading platforms.

On decentralized finance, James proposed holding DeFi platforms to account when they act as intermediaries in potential fraud. She urged that the law prevent use of digital assets that cannot be fully traced after passing through transaction-mixing services and require platforms to retain data that lets investigators follow funds.

Timing for action is tight. Congressional leaders are pressing for a Senate floor vote on comprehensive crypto legislation in the coming days. The House is in its final week before recess and the Senate is scheduled to leave Washington on Aug. 7, narrowing the window for passage. Backers need at least 60 votes in the Senate to overcome a filibuster, and party-line divisions remain.

Jaret Seiberg of TD Cowen wrote in a note that the next 10 days are critical and flagged ethics and conflicts of interest as major hurdles. He wrote, “Democrats do not trust the Trump administration to police conflict of interest standards for crypto that apply to the President. Trump does not want to empower states to prosecute him over his crypto endeavors. There is no simple middle ground here.”

Industry groups and some institutional investors have urged Senate leaders to pass the bill, saying it would create clearer rules for digital assets. Advocacy groups have said they will track and score lawmakers' votes on the measure. Financial-disclosure documents released recently show payments tied to World Liberty Financial, which has drawn additional scrutiny during negotiations.

In her written testimony, James concluded that federal legislation should preserve state and local capacity to pursue fraud while including stronger AML and ethics safeguards at the national level.