How CLARITY Act Could Reshape Crypto Bankruptcy Protections for Customers

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This article was first published on The Bit Journal. US. lawmakers are pushing to strengthen legal protections for cryptocurrency users after the high-profile collapses of Celsius and Voyager exposed major gaps in bankruptcy law. According to Sen. Cynthia Lummis, a proposed CLARITY Act may help stop customers losing their crypto if another platform fails.

CLARITY Act Strengthens Customer Crypto Protections 

Lummis summarized the objective of the CLARITY Act in a popular post on X on July 20, saying that it would ensure “your crypto stays yours.” The message quickly spread its wings with many of them seeing it as a reaction to the legal issues that came with the failure of a number of crypto lending platforms.

One of the main provisions of the CLARITY Act is Section 701, which would define qualifying digital commodities and ancillary assets as customer property if they are held on behalf of customers during specific Chapter 7 bankruptcy proceedings. Those assets would not go to a bankrupt company’s general creditors, but to customers, under customer-property rules.

When Celsius and Voyager went bankrupt, customer deposits didn’t stay customer deposits. They became assets in a bankruptcy pool, fought over by creditors who had never even heard of the customers who owned them. The Clarity Act changes the rule so your crypto stays yours, even…

— Senator Cynthia Lummis (@SenLummis) July 20, 2026

Asset Classification Determines Bankruptcy Protection 

However, the protection offered by the CLARITY Act is not automatic. Eligibility is dependent on a number of factors, such as the type of digital asset, the structure of the account, and the specific bankruptcy process involved, legal professionals note. The asset withheld is more likely to be eligible than the asset deposited in a lending or yield-generating product.

The bill also makes a distinction between various types of assets. The traditional securities, bank deposits and commodity contracts would remain under the existing legal regimes, and payment stablecoins are dealt with separately under another part of the CLARITY Act.

Celsius Bankruptcy Highlights Why the CLARITY Act Matters 

As Celsius continues to collapse, the conversation about crypto regulation and the need for the CLARITY Act is being discussed. In January, 2023, a U.S. bankruptcy court determined that roughly $4.2 billion in cryptocurrency held by approximately 600,000 Earn accounts was part of the bankruptcy estate, not individual customers.

The court ruled based on the account agreement between Celsius and its depositors, which stated that the deposited crypto assets become Celsius’ property. This meant that the Earn users were now classified as unsecured creditors rather than the owners of their respective digital assets, making it extremely difficult to recover their assets.

The CLARITY Act has the potential to yield a different result for customers who may not have their cryptocurrencies loaned to the platform.

CLARITY Act Faces Legal Uncertainties Ahead 

However, Lummis’ message was still positive and there are some legal uncertainties. A platform that only protects customer assets may be better protected under Section 701 of the CLARITY Act. If users consent to lending arrangements where they transfer ownership to the platform, however, courts may find that the users only have repayment claims.

It also provides for enabling lawful self-custody in the form of self-hosted wallets, further separating assets under direct control of users from those under the control of financial intermediaries.

The Senate Banking Committee voted to approve the expanded CLARITY Act package in May, but the legislation has yet to be voted on by the Senate floor. The final text of Section 701 may shape the success of the CLARITY Act in shielding crypto investors in the event of another major platform failure as lawmakers finalize the language for the legislation.

Conclusion 

The CLARITY Act may represent a major change in the way customer crypto assets are treated in the event of a platform bankruptcy, though the ultimate implications of the bill will hinge on the language and account structure that it will finally adopt. Investors need to take great care to identify whether they are using assets in custody or lending programs until then.

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Summary

• CLARITY Act aims to protect customer crypto during bankruptcies.
• Custody assets may receive stronger protection than lending accounts.
• The bill awaits a Senate vote before becoming law.

Glossary of Key Terms

CLARITY Act: Proposed U.S. crypto regulation bill.

Section 701: Protects qualifying customer-held crypto.

Chapter 7 Bankruptcy: Company asset liquidation process.

Customer Property: Crypto legally owned by customers.

Custody Account: Platform stores customer crypto.

Lending Account: Crypto deposited for lending or yield.

Bankruptcy Estate: Assets of a failed company.

Frequently Asked Questions about CLARITY Act

1: What is the CLARITY Act?

A proposed U.S. bill to strengthen crypto customer protections.

2: What does Section 701 do?

It protects qualifying customer-held crypto in certain bankruptcies.

3: Why is the Celsius case important?

It showed how lending agreements can affect crypto ownership.

4: Is the CLARITY Act law?

No. It is still awaiting Senate approval.

References

Twitter

Banking/senate/gov

Cases/stretto

Disclaimer

The article is purely informational and it is not a financial, investment, or a trading advice. Cryptocurrencies are extremely risky and volatile. Before investing, the readers are to conduct personal research and seek the advice of a qualified financial expert.