CLARITY Act would weaken state fraud powers, James warns

New York Attorney General Letitia James has urged Congress to revise the CLARITY Act, warning that the crypto market structure bill could restrict states from prosecuting fraud and enforcing investor protection laws.

James challenges the CLARITY Act’s enforcement rules

James raised the concerns in written testimony submitted to a Senate committee as lawmakers continued negotiations over the federal crypto bill.

She argued that the CLARITY Act would interfere with state investor protection laws and reduce the authority of state and local agencies to prosecute misconduct involving digital assets.

“This is a mistake,” James wrote.

The New York attorney general said state and local law enforcement agencies conduct most enforcement work across the United States. According to figures included in her testimony, those authorities are responsible for about 98.8% of arrests, compared with roughly 1.2% by federal agencies.

“Despite this, CLARITY would neuter state and local law enforcement by preempting states and preventing them from fully prosecuting rampant fraud and violations of law by actors in the cryptocurrency marketplace.”

Her intervention adds to Democratic concerns about whether the bill gives state authorities enough power to pursue crypto fraud and enforce its proposed ethics restrictions. James has asked Congress to add stronger investor protection, anti-money-laundering and ethics safeguards to the legislation.

State enforcement becomes a Senate sticking point

Some Democratic senators have objected to giving the Department of Justice sole responsibility for enforcing provisions that restrict digital asset activities by public officials. They want state prosecutors to share that authority rather than relying entirely on federal enforcement.

The dispute matters for New York because the state has its own financial laws and an active enforcement record covering crypto companies. Federal preemption could limit how New York and other states apply their existing laws when federal and state standards overlap.

For US investors, the disagreement centers on who can act when a crypto company is accused of fraud. Supporters of state authority argue that local prosecutors provide another route for enforcement, while advocates of a national framework say consistent federal rules could reduce conflicting requirements across states.

The CLARITY Act would establish a broader federal market structure for digital assets and divide oversight responsibilities between the Securities and Exchange Commission and the Commodity Futures Trading Commission. The Senate Banking Committee advanced the legislation 15–9 in May, but Democratic support at the committee stage does not guarantee enough votes on the floor.

Republicans still face a 60-vote hurdle

Senate Majority Leader John Thune is considering starting the floor process before lawmakers leave Washington for the August recess, even though passage before the break appears unlikely.

The process could begin with Thune filing cloture on a motion to proceed. That filing would typically set up a vote two Senate session days later, with at least 60 senators needed to advance.

If cloture succeeds, the Senate could debate the motion for up to 30 hours before voting on whether to formally take up the bill. Clearing that stage would not pass the CLARITY Act, but it would bring the measure closer to a full floor debate.

Republicans hold 53 seats and therefore need Democratic support even if the party remains largely united. Senator Mitch McConnell is expected to remain absent, while Republican Senators Josh Hawley and Rand Paul have not confirmed whether they would support the measure.

Both Hawley and Paul opposed the GENIUS Act during its initial Senate procedural vote in 2025, increasing uncertainty over how many Democratic votes Republicans may ultimately need.

Banking dispute adds pressure before the recess

Stablecoin rewards remain another obstacle in the negotiations. Thune told reporters that lobbying by banking groups over provisions allowing crypto platforms to offer stablecoin yield was affecting the talks.

Banks have argued that yield-bearing stablecoin products could pull deposits away from traditional financial institutions. Crypto companies have resisted broad limits, treating rewards as an important way to attract and retain customers. The same disagreement previously contributed to delays in the market structure talks.

Thune has also indicated that senators could offer numerous amendments if leadership files cloture. Meanwhile, other bills, including the SAVE America Act and proposed sanctions against Russia, are competing for limited floor time.

Charles Schwab has joined crypto industry groups in supporting the CLARITY Act, but James’s warning shows that enforcement powers remain a barrier to a bipartisan agreement. Without a deal on state authority, ethics rules and stablecoin rewards, starting the floor process may expose the Senate’s divisions without producing final passage before the recess.