CLARITY Act Clears Committee, But Money Laundering Question Hovers Over Crypto

• Senate Banking Committee voted 15-9 Thursday to advance CLARITY Act crypto regulation proposal to full chamber
• Bank Policy Institute cited Chainalysis data showing illicit crypto addresses received $154 billion in 2025, up 162% year-over-year
• Stablecoins, primarily Tether, now account for 84% of illicit transaction volume, displacing Bitcoin as criminals’ preferred payment method

• $154B Illicit crypto flows in 2025 versus $59.4 billion in 2024
• 694% Year-over-year increase in value received by sanctioned entities in 2025
• 84% Share of illicit transaction volume now flowing through stablecoins versus Bitcoin

The Senate Banking Committee cleared the CLARITY Act for broader consideration Thursday with bipartisan support, marking the most significant movement on crypto regulation in the 119th Congress. The 15-9 vote sent the bill to the full Senate after weeks of contentious markup negotiations over stablecoin restrictions, enforcement standards, and market structure rules.

Yet the committee’s advancement comes amid an intensifying campaign by banking regulators to link crypto regulation directly to money-laundering concerns, with the Bank Policy Institute releasing detailed crime-flow analysis hours before the vote that underscores the institutional stakes in how Congress ultimately defines crypto compliance obligations.

Bank Policy Institute Releases $154 Billion Illicit Flow Data Amid Committee Vote

The timing of the Bank Policy Institute’s data release proved deliberate. As senators debated amendments on stablecoin yield restrictions and AML enforcement language inside the markup session, the BPI published analysis from Chainalysis showing that illicit crypto addresses received $154 billion in 2025, a 162 percent increase from $59.4 billion in 2024.

The surge was driven largely by a 694 percent year-over-year jump in value flowing to sanctioned entities, foreign governments and terrorist organizations, signaling that crypto infrastructure is becoming increasingly central to international sanctions evasion.

The data carried immediate regulatory implications. According to the BPI analysis, the on-chain money laundering ecosystem expanded from $10 billion in 2020 to over $82 billion in 2025, with stablecoins accounting for 84 percent of all illicit transaction volume.

Tether (USDT), the largest stablecoin by market capitalization and incorporated in El Salvador, now displaces Bitcoin as the preferred payment method for criminal and sanctioned actors. This shift matters because stablecoins offer speed, certainty of value, and lower volatility than Bitcoin, characteristics that make them operationally superior for illicit cross-border flows.

The BPI also flagged the Islamic Revolutionary Guard Corps, whose on-chain crypto activity reached over $3 billion in 2025, representing roughly 50 percent of Iran’s total crypto ecosystem by the fourth quarter.

That concentration, the institute argued, demonstrates how foreign adversaries are using decentralized finance and stablecoins to circumvent traditional banking sanctions, a vulnerability that current U.S. law does not adequately address.

The BPI’s core argument: crypto platforms have operated with minimal anti-money-laundering staffing compared to banks, which employ tens of thousands of AML professionals, and that gap has become a material national security concern.

Tether’s Regulatory Blind Spot Under Current Stablecoin Proposals

A central focus of the BPI’s critique was the GENIUS Act, a stablecoin bill that imposes certain compliance requirements on U.S.-domiciled stablecoin issuers but exempts foreign operators. Because Tether is incorporated outside the United States, it sits entirely outside that regulatory perimeter.

The institute noted that unhosted wallets, cross-chain bridges, and mixing services are “specifically designed to frustrate tracing and openly advertised as such”, meaning the infrastructure that enables illicit stablecoin flows is deliberately obfuscated and widely accessible.

The regulatory gap is substantial. Tether maintains dominance across emerging markets, conflict zones, and sanctioned jurisdictions where dollar remittance costs or capital controls make traditional banking prohibitively expensive.

The stablecoin’s lack of a domestic regulatory home means U.S. banking regulators cannot directly enforce AML requirements on Tether’s operation or conduct, though they can impose sanctions on intermediaries that facilitate its use.

This creates what the BPI characterized as a structural vulnerability: stablecoins are functionally replacing dollars in illicit flows, but dollar-denominated stablecoins themselves fall outside the Federal Reserve’s oversight framework.

The stablecoin debate became the most contentious issue in CLARITY Act markup. Banking groups, including members of the American Bankers Association, spent weeks lobbying senators to tighten language restricting yield-bearing stablecoins, products that pay interest on deposits and therefore resemble uninsured bank deposits.

Those groups sent more than 8,000 letters to Senate offices ahead of Thursday’s vote, while the crypto advocacy group Stand With Crypto reported that its supporters contacted lawmakers nearly 1.5 million times in support of the bill. The asymmetry in lobbying intensity underscores that crypto and banking interests are fundamentally misaligned on how stablecoins should be classified and regulated.

Committee Advances Bill Despite Warren Amendments and Banking Pressure

Despite more than 40 amendments proposed by Senator Elizabeth Warren and procedural disputes during markup, the CLARITY Act advanced with support from Democratic senators Ruben Gallego and Angela Alsobrooks. Warren, a longtime skeptic of cryptocurrency, used her amendments to attempt inserting stricter money-laundering language, enforcement thresholds, and disclosure requirements into the bill.

Her amendments did not succeed, but their rejection signals that the committee majority prioritized market-structure clarity over aggressive compliance mandates.

The 15-9 vote revealed clear partisan alignment: Republicans and moderate Democrats voted to advance the bill, while Warren and allies sought to either kill it or rewrite its enforcement provisions.

This division matters because final Senate passage will require either broader bipartisan consensus or use of the reconciliation process, both paths that could force compromise on stablecoin and AML language. The committee’s advancement does not settle the money-laundering question; it defers it to floor debate and eventual conference with the House.

Institutional investors should note that the BPI’s crime-flow data was released by a banking-industry advocacy group, not an independent regulator, and it carries an implicit regulatory agenda: tighter crypto compliance rules benefit traditional finance by raising compliance costs for crypto platforms.

Binance Research Contests BPI’s Illicit Flow Characterization

The crypto industry did not accept the BPI’s framing without challenge.

On May 14, Binance Research published analysis pushing back on the claims of rising illicit flows, arguing that on-chain traceability has actually improved and that much of what regulators classify as “illicit” activity reflects address clustering, sanctions designations on inactive wallets, or legitimate business transactions flagged by overly broad heuristics.

The Binance analysis suggested that the BPI’s $154 billion figure inflates actual criminal activity by conflating movement of funds through sanctioned wallets with active criminal intent.

This counter-argument reflects a broader institutional divide: compliance platforms and law enforcement emphasize the speed and scale of stablecoin illicit flows, while exchanges argue that on-chain data is opaque and that transaction volume alone does not prove criminal use.

The disagreement is not trivial, it determines whether Congress should impose banking-style AML requirements on crypto platforms or whether existing sanctions enforcement and transaction monitoring are sufficient. Institutional investors exposed to stablecoin networks have material interest in which interpretation ultimately shapes final legislation.

The underlying technical question remains unresolved: How much of the $154 billion in movement to “illicit addresses

Original reporting: cryptopotato.com