Baran Ozkan argues delays to U.S. CLARITY Act crypto rules create AML gaps, regulatory arbitrage, and rising fraud risk across digital asset markets.
By Baran Ozkan, Co-founder & CEO, Flagright.
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A White House meeting meant to break the stalemate on U.S. crypto market‑structure legislation ended without a deal. The sticking point was incentives and whether intermediaries should be allowed to pay interest or rewards on stablecoin holdings, and what that might mean for bank deposits and financial stability. With no compromise, the CLARITY Act, which passed the House, remains delayed and the U.S. remains stuck in a patchwork of rules, guidance and enforcement.
For criminals, this is a high‑leverage environment. It’s not lawless, but it is ambiguous. The U.S. already has strong anti‑fraud, AML and sanctions tools, and even the House‑passed CLARITY Act explicitly references the application of the Bank Secrecy Act. The issue is that unclear market‑structure rules create uneven incentives, slower co-ordination and more room for regulatory arbitrage.
How delay creates exploitable gaps
The delay in passing the CLARITY Act creates accountability gaps. When it’s unclear whether a token is treated as a security or commodity, financial firms delay making hard choices such as what to register as, what disclosures to provide and which market abuse and custody standards to build. That uncertainty rewards operators who compete on speed and frictionless onboarding, the same conditions that fraudsters seek, and it penalizes firms that invest early in controls.
At the same time, the uncertainty is creating supervision gaps. Senate consideration has been postponed amid objections from both banks and crypto firms, including disagreement over stablecoin rewards. Whatever side you take, the operational result is fragmented oversight for longer, leading to slower rulemaking, slower standard setting and slower alignment on what ‘good’ compliance looks like.
There are also market integrity gaps. Uncertainty pushes activity to the edges, including lightly supervised intermediaries, offshore venues, and products engineered to sit ‘between’ categories. That migration doesn’t just increase consumer risk; it also makes illicit activity harder to see because it disperses flows across more venues and more jurisdictions.
What thrives in uncertainty: Fraud first, laundering second
Most crypto laundering happens downstream of fraud. Criminals start with a victim and then use crypto rails for speed, reach and conversion.
Firstly, there are industrialized scams. “Pig butchering,” impersonation and account‑takeover fraud have scaled with generative AI and operational playbooks that move victims from regulated fiat rails into crypto quickly. Financial intelligence reporting has also highlighted “chain hopping” and mixing as common typologies, and industry research has described greater use of cross‑chain bridges as part of laundering and off‑ramping paths.
Meanwhile, standard setters have warned that illicit actors use stablecoins to move value quickly, particularly on networks optimized for cheap transfers, and pair them with obfuscation methods.
Even when the crime is on‑chain, the operational goal is usually off‑chain, cashing out through exchanges, OTC brokers, money mules, or other intermediaries that blur attribution and complicate recovery.
None of this requires a perfect laundering method. It just requires options, with enough redundancy that when one route is disrupted, another is available.
Why regulatory ownership matters
The CLARITY Act is, at its core, an attempt to settle who is in charge by defining how tokens are classified and clarifying jurisdiction, including expanding the CFTC’s authority over spot crypto markets. Clear ownership matters for two reasons.
First, enforcement needs a coherent map. If boundaries are contested, bad actors exploit the seams where one agency assumes another is responsible, where definitions leave room to litigate and where compliance expectations diverge.
Second, markets need predictable incentives. Lawful firms can build to clear requirements, governance, disclosures, custody controls, market‑abuse surveillance and AML programs proportionate to risk. When the rules of the road are uncertain, compliance becomes a competitive disadvantage rather than a market expectation.
At the same time, “clarity” can’t be shorthand for carve‑outs. Critics, including state securities administrators and security/transparency groups, have warned that poorly designed definitions could create loopholes for illicit finance and sanctions evasion.
What regulators will expect once the CLARITY Act passes
Even without predicting the final statutory text, the direction of travel is clear. Firms will need to prove, not merely assert, that they can detect and prevent fraud and illicit finance both on‑chain and off‑chain.
Expect emphasis on:
- Traceability, with linking on‑chain activity to real world identity via KYC/KYB, beneficial ownership where relevant and defensible wallet/counterparty risk methods.
- Market abuse controls. Surveillance for manipulation, wash trading and co-ordinated activity, not as a reporting exercise, but as an intervention capability.
- Sanctions and typology coverage, involving screening that goes beyond names to include wallet exposure and typologies involving mixers, bridges and rapid cross‑chain routing.
- Operational readiness. Incident response, rapid investigation and high‑quality regulatory reporting, as well as measurable performance such as time‑to-detect and time‑to-interdict.
- Governance and independent testing. Evidence that controls work through audits, model risk management, third party reviews and remediation discipline.
The bottom line
The CLARITY Act debate is often framed as banks versus crypto firms, or SEC versus CFTC. The more important distinction is simpler. Markets with consistent rules and supervision attract lawful activity; markets with prolonged ambiguity attract arbitrage, including criminal arbitrage.
Legislation will help, but criminals won’t wait for it. The institutions that will thrive in the next phase are those building resilient controls now; controls that reduce fraud, raise the cost of laundering and still hold up when clarity finally arrives.
