CLARITY Act is Quietly Killing 90% of Tokens

Original Author: Ching Tseng

Original Compiled by: TechFlow

TechFlow Insights: Most tokens released in the last cycle share a pricing issue no one wants to address openly: If your token cannot legally share in the protocol's revenue, what exactly are you holding? Author Ching Tseng breaks down the issue clearly:

The three pillars of token valuation are simultaneously weakening. Buyback & Burn is the current safe haven for protocols, a two-tier compliance structure might be the future, but in between, most tokens are being priced based on something that hasn't been clearly defined yet.

Most tokens launched in the last cycle have a pricing problem no one wants to discuss. If your token cannot legally share in protocol revenue, what exactly are you holding? The CLARITY Act didn't kill DeFi; it just forced everyone to admit something they already knew deep down.

Almost every token launch carries an unspoken promise.

This promise was never written into any legal document. It lives in the footnotes of whitepapers, in Discord chat threads, and in a collective, implicit assumption — that governance rights will eventually translate into some form of economic return. The logic was simple: As the protocol grows, you benefit.

The CLARITY Act is making this promise very difficult to fulfill.

The law does only one thing, but it's a critical one

The bill categorizes every digital asset into two buckets.

Digital Commodity: Falls under CFTC (Commodity Futures Trading Commission) jurisdiction. Decentralized enough, with no single entity controlling over 20% of voting rights or token supply. Bitcoin and Ethereum fall into this category.

Investment Contract Asset: Falls under SEC (Securities and Exchange Commission) jurisdiction. An identifiable issuer exists, and holders expect profits from the efforts of others.

The awkward truth is that most tokens from the last cycle — UNI, AAVE, MORPHO, PENDLE, OP, ARB, and half of the L1 and DeFi tokens you can name — don't fit neatly into either bucket. Real protocols, real revenue, but the legal nature of the token itself has never been defined.

The CLARITY Act says: Pick a side. Ambiguity is no longer an option.

What most people miss

Once a token trades on secondary markets, under the CLARITY Act framework, it tends to fall under CFTC jurisdiction and be classified as a digital commodity. There's basically no turning back. All tokens already trading on @binance or @coinbase, once the Act is in effect, will likely be locked into the 'digital commodity' designation. The CFTC oversees oil, gold, wheat — assets no one holds expecting quarterly dividends just for holding.

The same logic applies here, but with an important nuance. While digital commodities fall under CFTC and are treated as traditional commodities rather than securities, this doesn't mean protocols can risk directly distributing revenue to token holders. According to the joint interpretative guidance from the SEC and CFTC in March 2026, if holders have a reasonable expectation of profit derived from the continuous development, management, or efforts of others, this arrangement could still be deemed an investment contract and pulled back under SEC scrutiny. Even for tokens already trading, promises made during the initial issuance or in public communications, if not explicitly disclaimed, could persist and create retrospective risk exposure.

This is why many protocols have turned to Buyback & Burn, viewing it as a safer, more practical mechanism: channeling revenue towards open market repurchases and token burns, supporting prices by reducing supply and driving capital appreciation, rather than directly distributing income. Another path gaining attention is building a permissioned layer on top of the base protocol. The original permissionless layer continues with Buyback & Burn. The new compliant access layer is open only to verified users, granting verified holders the legal right to share in protocol revenue. This idea makes sense theoretically, but it introduces its own complexities: the same token carries different legal rights on different layers, raising issues of contractual consistency and fair treatment of holders.

So, what is actually propping up token prices?

Historically, token valuation relied on three things.

Speculative Premium: The market believes the protocol will grow, so people pay now for future upside potential. For most tokens, this is the dominant factor.

Governance Premium: Holding the token gives you voting rights. In theory, controlling key infrastructure has value.

Utility Demand: Some tokens are necessary to use the protocol or offer fee discounts.

Before regulatory clarity, you could mix these three together and tell a vague but workable valuation story. After the CLARITY Act, each pillar is weakening. Once the expectation of legally sharing in revenue is removed, the speculative premium loses its foundation. The governance premium historically collapses in bear markets — no one cares about voting rights for a protocol that can't return value. Utility demand is real, but it only works for a small subset of token designs.

For most tokens, the pricing logic is quietly breaking down.

What protocols are doing now

The most common response is Buyback & Burn.

Protocol revenues flow into the DAO treasury. The treasury uses this money to buy back tokens on the open market and burn them. Holders don't directly receive anything — but the supply decreases, which should theoretically support the price.

@Uniswap started this in late 2025, directing 17% of swap fees to buy back UNI. @aave followed in 2026, directing 100% of protocol revenue to buy back AAVE.

The legal logic: Capital appreciation is not income distribution. It's much harder for the SEC to attack buybacks than dividends.

But let's be realistic. GMX and Metaplex both ran significant buyback programs, burning between 6.5% and 12.9% of their total supply. Their token prices still dropped over 70%. Buyback & Burn is the safest option for now, but it's not a cure-all.

There's a more interesting path, and some are already on it

If buybacks aren't enough, what's next?

The idea being taken more seriously is building a permissioned layer on top of the base protocol.

The original layer remains permissionless, open to everyone, no KYC required. Tokens on this layer continue with Buyback & Burn.

The new layer is a compliant access layer. Verified holders can enter. Here, holding the token comes with the legal right to share in protocol revenue. Direct distribution, fully compliant.

This direction makes sense. But a problem remains that hasn't been cleanly resolved: You hold the same token, but it has different legal implications on different layers. KYC'd holders can receive income distributions; non-KYC'd holders cannot. Same contract, same token. This inconsistency is arguably more problematic legally than direct revenue distribution.

Where things are heading

Three scenarios all seem plausible, and I genuinely don't know which will prevail.

Scenario One: The SEC explicitly endorses Buyback & Burn. They issue a no-action letter confirming that buyback mechanisms do not constitute an investment contract. The industry gets a clear floor to build upon. Many are waiting for this signal; it would significantly change the entire calculation.

Scenario Two: The two-tier model becomes the standard. As the regulatory framework matures, the permissioned layer receives a clear safe harbor. KYC'd holders get compliant income rights, non-KYC'd holders get liquidity and governance rights, two parallel markets coexist. This requires protocols to absorb significant compliance costs and act quickly.

Scenario Three: Most token prices permanently decouple from protocol performance. The protocol does well, but the token doesn't. The price becomes a function of market sentiment, with no structural link to how much the underlying protocol actually earns. This is bad for retail holders, but not necessarily fatal for the protocol itself.

Some thoughts of mine

I once hoped tokens could function like stocks, but the new regulations have essentially closed that door. What no one wants to fully think through is what this actually means.

If a token cannot, in any legally sound way, allow holders to share in the protocol's success, then holding it long-term is essentially betting on sentiment. Sentiment can sometimes yield amazing returns. But it's not an investment thesis.

Buyback & Burn is where we are now. The two-tier model is likely where this is headed. But in between here and there, most tokens are being priced on something that hasn't been clearly defined yet.

The alpha for the next cycle might not be in finding the fastest-growing protocol. It might be in identifying protocols that have truly figured out how to link token value to business performance, in a way that can withstand legal scrutiny.

Those are the ones worth holding.