NY Attorney General Letitia James warns Clarity Act would 'dilute' states' ability to go after fraud as pressure mounts

New York Attorney General Letitia James urged Congress to tighten proposed cryptocurrency legislation, warning that it would weaken states' ability to police the industry, and urged lawmakers to add stronger anti-money-laundering and ethics safeguards.

The Clarity Act would undermine New York, which has been a leader in regulating crypto for over a decade, as well as other states, James said in written testimony on Monday to the Senate Homeland and Governmental Affairs' permanent subcommittee.

"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," James said. "This is a mistake. State and local law agencies do the lion’s share of law enforcement work in this country."

James' testimony comes as lawmakers in Washington are working to get a floor vote in the Senate for sweeping legislation that would regulate the crypto industry for the first time at the federal level. As of this week, it's unclear whether Republicans can eke out enough support to get that bill through the Senate after releasing text that so far has not garnered necessary Democratic support.

One issue has been the bill's ethics language that currently bars public officials and their spouses from issuing or sponsoring digital assets but does not cover other family members. It also gives enforcement authority to the Justice Department and includes a sunset clause that would expire the restrictions in January 2029.

Democrats have demanded stronger language to address Trump’s crypto interests, including a memecoin he launched before Inauguration Day and his family’s involvement in World Liberty Financial. Financial disclosures released last month revealed that Trump received millions of dollars tied to WLF.

The ethics provision should block federal officials and employees from regulating industries they profit from when in office as well as a year after leaving public office, James said.

James also pushed for Congress to hold DeFi platforms responsible for serving as intermediaries for potential fraud.

"Congress must ensure that when law enforcement looks to solve a crime, we have the tools to do so, and that requires the cooperation of financial intermediaries, no matter the underlying technology," James said.

The Clarity Act should block crypto that can't be "fully traced" through going through mixers and require crypto platforms to comply with know-your-customer rules and anti-money laundering rules, James said.

Timing is an issue

Time is running out to get a bill signed into law this year. This week marks the House's final week in session before it recesses, while the Senate is scheduled to leave Washington on Aug. 7. In the weeks that follow, lawmakers' attention will increasingly shift to the election cycle, which is expected to dominate the agenda for the next several months.

In a note on Monday, TD Cowen’s Washington Research Group, led by managing director Jaret Seiberg, called the next 10 days before lawmakers go back on recess "critical," with ethics being one of a few challenges.

"Democrats do not trust the Trump administration to police conflict of interest standards for crypto that apply to the President," Seiberg said. "Trump does not want to empower states to prosecute him over his crypto endeavors. There is no simple middle ground here."

If the bill does pass the Senate with at least 60 votes, it would still have to go back to the House, which voted to push the bill through a year ago.

Pressure rises

The push to pass the Clarity Act has intensified over the past week, with crypto industry groups and traditional backers pressing for the bill to become law.

Last week, the Crypto Council for Innovation, the Blockchain Association and The Digital Chamber sent a letter to Senate leadership pressing for the Clarity Act to be passed to "improve upon the status quo by establishing durable rules for digital assets that protect consumers, safeguard markets, and ensure that innovation can thrive in the United States."

Crypto advocacy group Stand With Crypto, which played a significant role in elections in 2024,  said on Monday it would be scoring lawmakers on how they vote on the Clarity Act. The Coinbase-backed organization is known for its candidate scorecard, which gives lawmakers and candidates a score based on their support for crypto.

Global investment management firm Franklin Templeton, which has dabbled in crypto, pushed for the Clarity Act to pass on Monday in a post on X.

"The bill would make clear how crypto is regulated. Investors would know what protections apply," the firm said. "Firms would know which regulators they answer to."