CLARITY Act’s Section 604 Seeks to Redefine Money-Transmitter Liability in DeFi

Why the definition matters

Under the Bank Secrecy Act, a money transmitter is generally a person or business that accepts currency, funds, or other value that substitutes for currency from one person and transmits it to another person or location. That category was built for traditional payment businesses such as wire services and remittance providers, but the phrase covering “other value” later brought crypto into scope.

The classification carries significant obligations. At the federal level, money transmitters are treated as money services businesses regulated by FinCEN. They must register, maintain anti-money-laundering programs, keep records, and file required reports, while also complying with sanctions rules. State law adds another layer: 49 states require separate money-transmitter licenses, creating a complex patchwork for companies operating nationwide.

The stakes rise further because operating an unlicensed money-transmitting business can be prosecuted as a federal crime under 18 U.S.C. Section 1960. That has made the boundary more than a compliance issue. A mistaken classification can become the basis for an indictment.

Where crypto firms clearly fall

For much of the crypto industry, the legal perimeter is relatively settled. Exchanges, custodial wallets, and payment processors are generally understood to be money transmitters. In practice, that means identity checks, transaction monitoring, withdrawal reviews, and broader know-your-customer and AML controls.

FinCEN’s 2013 guidance helped establish that framework for crypto businesses. The more difficult question emerged later around software that lets users transact without the developer ever taking possession or control of the assets involved.

The non-custodial split

Industry participants widely read FinCEN’s 2019 guidance as drawing a control-based line. If a business has independent control over user value, it may be a transmitter; if a developer merely publishes software and users move their own funds, the developer would fall outside that category.

That understanding was thrown into doubt by the Tornado Cash and Samourai Wallet prosecutions. Those cases advanced a different theory: that a developer can be involved in transmitting value through software even without custody. The result is a central unresolved question for DeFi: can someone be said to transmit money they never control?

Courts have not fully settled the issue, and outcomes have varied. That uncertainty has made the question especially important for developers of non-custodial wallets and DeFi protocols, who argue that treating code publication as money transmission risks turning software development into a regulated financial activity.

What Section 604 would do

Section 604 of the CLARITY Act would codify the control test. As described in the bill debate, developers and publishers of non-custodial software that never takes control of user funds would not be treated as money transmitters under the Bank Secrecy Act.

The proposal would not remove existing obligations from custodial businesses. Exchanges, hosted wallets, processors, kiosks, and other intermediaries that hold or manage customer funds would remain inside the regulatory perimeter. The distinction Section 604 focuses on is whether the business actually controls customer assets.

Supporters present the measure as a way to provide legal certainty and protect software publication. Opponents, including district attorneys’ associations cited in the debate, argue that narrowing the definition could make criminal investigations harder. That is why the exact wording of the provision matters as much as whether the broader bill passes.

The fight over Section 604 is ultimately about how a decades-old money-transmission framework applies to modern crypto software. Congress is being asked to decide whether non-custodial code should be treated like a financial business or as publishing activity outside the money-transmitter category, while leaving traditional custodial actors fully regulated.