The CLARITY Act should extend protections to self-custodied wallets

• Key insight: Regulators must move toward a more workable model that regulates the intermediaries that custody and control assets, not the underlying software.
• What's at stake: Regulation has lagged behind, leaving builders, users and institutions to navigate by instinct rather than by map.
• Forward look: Regulating the intermediaries that custody and control assets is the smarter choice, as blockchains provide transparency and thus better compliance than in traditional banking. 

As blockchain technology has matured, a killer use case has emerged: payments. They're already used for cross-border transfers, treasury operations and, increasingly, real-world payments.

But regulation has lagged behind, leaving builders, users and institutions to navigate by instinct rather than by map.

With the Digital Asset Market Structure Clarity Act moving through the U.S. legislative process, the road is finally starting to take shape. It begins to address long-standing questions around the division of responsibility between the SEC and CFTC, establishes clearer registration pathways for exchanges and custodians, and starts to define how developers and self-custody should be treated.

But CLARITY has one glaring flaw: It doesn't protect self-custodial infrastructure.

Regulators typically treat self-custody as inherently noncompliant. This is misguided and reflects a misunderstanding of the modern payments stack. Software providers, such as wallets, protocols and messaging layers, are not financial intermediaries; they rarely take custody of funds. 

So why does regulation treat software as if it were a bank or broker? This mischaracterization has downstream impacts: The ambiguity disincentives innovation, slows product development and increases costs. Most glaringly, it pushes builders away from compliant ecosystems, which negates the whole point of regulation in the first place: to reduce risk. 

This is especially problematic for blockchain-based payments, which are programmable so compliance can happen within the transaction itself. For instance, The EU Transfer of Funds Regulation, or TFR, requires collection of originator and beneficiary information for transfers involving self-custodial wallets above €1,000. 

A common assumption is that this requires either a separate know-your-customer process or blocking the transfer entirely. Neither is true. Wallet software can collect and transmit Travel Rule information as a structured step within the payment approval flow — before the on-chain transaction is broadcast. The regulated counterparty receives the required data; the user retains control of their keys throughout.

For sanctions compliance, the token standards used by major regulated stablecoins (including USDC and EURC) support an authorize-and-capture architecture to screen before settlement. The user signs an authorization off-chain, a regulated processor performs sanctions screening and the transaction is only submitted to the blockchain if it clears. This is functionally identical to the auth/capture model that card payment regulators already accept.

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For ownership compliance, there's cryptographic proof of wallet ownership for self-custodied wallets to pass know-your-customer checks. For example, MiCA requires regulated entities to verify that a customer controls the self-custodial wallet involved in a transfer. 

Established open standards allow a user to prove control of a wallet address by signing a message with their private key — without transmitting the key itself. Several major European exchanges already treat this method as satisfying their TFR obligations, and the European Banking Authority has indicated it is an acceptable approach.

Regulators must move toward a more workable model that regulates the intermediaries that custody and control assets, not the underlying software. This would actually be the smarter choice, as blockchains provide transparency and thus better compliance than in traditional banking. 

Getting these distinctions right is the single biggest unlock for payments. Once builders know the protocol layer is not exposed to enforcement risk, everything else becomes clearer.

And for consumers, the ability to use self-custodied funds ensures that intermediaries don't unnecessarily insert themselves between their wallets and their chosen financial services.