CLARITY Act Is Quietly Killing 90% of Tokens

Original Author: Ching Tseng

Original Translation: TechFlow

TechFlow Introduction: Most tokens issued in the last cycle share a pricing problem no one wants to address: If your token can’t legally share in protocol revenue, what exactly are you holding? Author Ching Tseng breaks this down clearly:

The three pillars of token valuation are simultaneously weakening. Buyback & Burn is the current go-to risk-averse choice for protocols, and a two-tier compliance structure may be the way forward. But in between, most tokens are being priced on something that hasn't been clearly defined yet.

Most tokens issued in the last cycle have a pricing issue no one wants to talk about. If your token can't 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, tacit assumption—that governance rights would eventually morph into some form of economic return. The narrative was simple: as the protocol grows, you benefit.

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

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

The bill categorizes every digital asset into one of two buckets.

Digital Commodity: Regulated by the CFTC (Commodity Futures Trading Commission). Decentralized enough that no single entity controls over 20% of voting rights or token supply. Bitcoin and Ethereum fall into this category.

Investment Contract Asset: Regulated by the SEC (Securities and Exchange Commission). There is an identifiable issuer, and holders expect to profit from the efforts of others.

The awkward truth is that most tokens from the last cycle—UNI, AAVE, MORPHO, PENDLE, OP, ARB, and half the L1 and DeFi tokens you can name—don't fit cleanly into either bucket. Real protocols, real revenue, but the legal nature of the token itself was never 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 usually leans towards CFTC jurisdiction as a digital commodity. There's essentially no going back. All tokens already trading on @binance or @coinbase, once the Act is effective, will likely be locked into the "digital commodity" status. The CFTC regulates oil, gold, wheat—assets no one expects to pay quarterly dividends just for holding.

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

This is precisely why many protocols are shifting to Buyback & Burn as a safer, more practical mechanism: directing revenue towards open market repurchases and token burns, supporting price through supply reduction and capital appreciation rather than direct income distribution. Another path gaining traction is building a permissioned layer on top of the base protocol. The original permissionless layer continues with Buyback & Burn, while the new compliant access layer is open only to verified users, granting vetted holders the legal right to share protocol revenue. This idea makes sense in theory, but introduces its own complexities: the same token carries different legal rights on different layers, raising issues of contract uniformity and equitable treatment of holders.

So what is 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 potential future upside. For most tokens, this is the dominant factor.

Governance Premium: Holding the token gives you voting rights. Theoretically, 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 elements together and tell a vague but functional valuation story. After the CLARITY Act, each pillar is weakening. Once the expectation of legally sharing revenue is removed, the speculative premium loses its foundation. The governance premium always collapses in bear markets—no one cares about voting rights in 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 revenue flows into the DAO treasury. The treasury uses this money to buy back tokens on the open market and then burns them. Holders don't receive anything directly—but supply decreases, which theoretically should support the price.

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

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

But a reality check is needed here. GMX and Metaplex both ran sizable buyback programs, burning between 6.5% and 12.9% of total supply. Token prices still dropped over 70%. Buyback & Burn is the safest option right 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 needed. 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 protocol revenue. Direct distribution, fully compliant.

This direction makes sense. But there's another problem that hasn't been cleanly solved: you're holding the same token, but it has different legal meanings on different layers. KYC'd holders get income distribution; non-KYC'd holders don't. Same contract, same token. This inconsistency is legally more troublesome than direct revenue distribution.

Where are we headed?

Three scenarios all seem plausible. I honestly don't know which one will prevail.

Scenario One: The SEC explicitly endorses Buyback & Burn. They issue a no-action letter confirming the buyback mechanism does 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 clear safe harbor treatment. KYC'd holders get compliant revenue rights, non-KYC'd holders get liquidity and governance rights, with two parallel markets coexisting. This requires protocols to absorb significant compliance costs and act quickly.

Scenario Three: Most token prices become permanently decoupled from protocol performance. The protocol does well, the token doesn't. Price becomes a function of market sentiment, with no structural link to how much money the underlying protocol actually makes. Bad for retail holders, but not necessarily fatal for the protocol itself.

My thoughts

I once hoped tokens could function like stocks, but the new regulations have essentially blocked that path. No one wants to fully think through what this really means.

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

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

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

Those are the ones worth holding.