Grassley’s Section 1960 Review Could Crush DeFi’s Safe Harbor-What’s Next?

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Senator Grassley’s Section 1960 Review Puts CLARITY Act Under Pressure

Key Highlights

  • CLARITY Act talks have shifted to developer protections tied to 18 U.S.C. § 1960.
  • Patrick Witt said Section 1960 is the final hurdle and should be resolved “very soon.”
  • Chuck Grassley’s expected review could shape whether DeFi safe harbors survive in the final Senate text.

As a researcher following the discussions around crypto regulation in the U.S., I’ve noticed a key sticking point has emerged in the Senate negotiations. The debate now centers on whether the protections for developers included in the CLARITY Act might inadvertently hinder federal efforts to enforce money-laundering laws. It’s a complex issue, as we’re trying to balance fostering innovation with maintaining robust financial crime prevention.

The disagreement revolves around a federal law (18 U.S.C. 1960) that regulates businesses which move money without a license. The key question in the proposed crypto legislation is whether developers of software, wallet providers, and those who build the underlying infrastructure for cryptocurrencies should be considered money transmitters if they don’t have control over users’ funds.

Patrick Witt, who advises the White House on digital assets, stated on Monday that overcoming Section 1960 is the last major step for the CLARITY Act, and he expects a resolution quickly. He believes protecting software developers is crucial for attracting blockchain innovators back to the U.S., as currently only 19% of crypto developers are based here.

I’ve been following this closely, and it’s now on Senator Chuck Grassley’s radar – he chairs the Senate Judiciary Committee. He’s likely to share his thoughts this week on some proposed changes to Section 1960. Specifically, they’re talking about making sure software developers who *knowingly* help launder money can’t hide behind legal protections. I’m seeing reports about this, but I’m waiting for official confirmation from Grassley’s office or the Judiciary Committee before I fully trust the details.

Negotiations around the CLARITY Act are now focused on Section 1960. Senator Chuck Grassley is likely to share his thoughts this week on proposed changes to this key part of the Act, which could remove legal protections from software developers who help process illegal money transfers.

— Coin Bureau (@coinbureau) May 4, 2026

Why Section 1960 matters for CLARITY Act

A new proposal from the Senate Banking Committee aims to protect developers and service providers who don’t have full control over users’ digital assets. Specifically, these are businesses that can’t independently process transactions – they need approval from another party to move or manage a user’s funds.

The proposed rules clarify that simply creating software, offering tools for users to manage their own funds, or helping to build blockchain technology wouldn’t automatically classify a developer or provider as a money transmitter under federal law. This means they wouldn’t be subject to the same regulations as businesses that directly transfer money on behalf of others, based on those activities alone.

This programming language is key for developers creating decentralized finance applications because it clearly distinguishes between the software they build and the handling of customer funds. Essentially, it safeguards developers who create and share code, build self-managed wallets, operate user interfaces, or maintain blockchain networks – all without actually holding onto customer assets.

As I’ve reviewed the draft legislation, it’s clear that developers won’t receive complete immunity. The previous version of the Senate Banking Committee’s language specified that even with these protections, developers or service providers could still be classified as money transmitters – and therefore subject to federal and state regulations, like those designed to prevent money laundering and the financing of terrorism – if their activities fall outside the scope of the protected actions. Essentially, these protections aren’t a free pass to ignore existing financial laws.

The debate currently revolves around finding a balance. Lawmakers want to shield developers who simply build crypto tools from legal repercussions, but they also don’t want to inadvertently create an opening for individuals accused of deliberately assisting illegal financial activity using cryptocurrency.

Grassley has already challenged developer protections

Senator Chuck Grassley’s involvement is important because the Judiciary Committee has already expressed concerns about certain protections for developers. According to Galaxy Research, Grassley and Senator Dick Durbin jointly opposed a part of the Blockchain Regulatory Certainty Act in January. They wrote to leaders of the Senate Banking Committee, arguing that this provision would change a section of federal law related to criminal activity.

In January, CoinDesk reported that Senators Grassley and Durbin blocked efforts to include protections for cryptocurrency developers in a larger bill about market regulations. They were worried these protections could create problems for law enforcement pursuing criminal cases.

The previous concern highlights the importance of Senator Grassley’s upcoming review of the CLARITY bill in the Senate. If members of the Judiciary Committee insist on more specific wording, developers working on DeFi projects might not receive as much legal protection as the broader crypto industry is seeking. However, if a middle ground is reached, the bill could shield developers who aren’t directly involved in illicit activity, but still exclude those who intentionally help launder money.

DeFi protections remain the political fault line

The disagreement over Section 1960 isn’t simply a legal detail; it strikes at the heart of the understanding behind the CLARITY Act and its approach to decentralized finance (DeFi).

People who support cryptocurrency are asking Congress to clarify that developers shouldn’t be held legally responsible for money transfers just because they create code or tools where users control their own funds. Meanwhile, lawmakers focused on law enforcement want to be sure this clarification won’t prevent them from prosecuting individuals who use software development to hide illegal financial activity.

As a crypto investor, I’m really hoping the Blockchain Regulatory Certainty Act passes. From what I understand, it’s designed to shield developers and those building the tools and infrastructure we all use – things like wallets or development platforms – from being unfairly labeled as money transmitters just because they’re contributing to the network. Basically, it protects them from being regulated like a traditional financial institution simply for offering software or support.

Despite this, law enforcement continues to have concerns because Section 1960 is a criminal law, not simply a labeling issue. This makes creating any exemptions politically difficult, particularly with Washington policymakers focused on preventing sanctions violations, money laundering, ransomware payments, and other illegal activities involving cryptocurrency.

Senate path depends on final language

The result will decide if CLARITY progresses as a comprehensive bill that safeguards the decentralized finance (DeFi) space, or if it stalls due to worries about how it will be used for criminal investigations.

Even after passing through the Senate Banking Committee, the CLARITY bill has several hurdles to clear before it can become law. It still needs 60 votes on the Senate floor, must be combined with related legislation from the Senate Agriculture Committee and the House of Representatives, and then receive final approval before being sent to the President.

The key issue for cryptocurrency companies is whether Congress can clearly distinguish between those who simply build the underlying technology and those who intentionally assist in illegal financial activity using digital assets.

The current proposal is now part of Section 1960. Senator Grassley’s examination of the bill will likely determine how much protection developers of decentralized finance (DeFi) technology will ultimately have in the final version passed by the Senate.

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2026-05-04 23:33