Four US law enforcement organizations have warned that a single provision in the CLARITY Act, the country's flagship crypto market structure bill, could carve out a class of crypto participants from know-your-customer and anti-money-laundering obligations. The concern, reported by journalist Eleanor Terrett and circulated by Cointelegraph on June 24, 2026, centers on Section 604 and the way it redraws who counts as a money transmitter.
The fight is narrow on paper and large in consequence. Section 604 does not rewrite the entire compliance regime. It changes one definition. Definitions in financial law decide who has to collect identity documents, file suspicious activity reports, and answer to the Treasury, so a small edit there reaches a long way.
The money transmitter line being redrawn
Section 604 narrows the circumstances under which a non-custodial software developer can be treated as a money transmitting business. The drafting intent is to protect people who write code but never touch user funds. Under the provision, building non-custodial software, without direction or control over the money and without knowledge of criminal proceeds, would no longer by itself trigger money transmission liability.
Supporters point out that the criminal carve-out under 18 USC 1960(b)(1)(C) stays intact. That statute makes it a federal crime to knowingly move funds tied to an offense, and it underpinned the Helix mixer prosecution and similar cases. On that reading, Section 604 trims a regulatory classification, not the criminal tools investigators already use.
The agencies' objection
The four law enforcement groups read the same text and see a gap. Their argument is that narrowing the money transmitter definition removes the regulatory hook before the criminal one is ever needed. Money transmitter status is what forces a business to run identity checks and report suspicious flows in the first place. Strip that status from a category of actors and the early-warning layer disappears, leaving prosecutors to act only after illicit funds have already moved.
The specific worry is DeFi. Investigators have said exemptions in the bill would weaken their ability to prosecute decentralized finance entities engaged in illegal money transmission. The dividing question is whether a given operator is a passive code publisher or an active service that exercises real control over funds while presenting itself as software. The bill's critics argue the line is blurry enough that bad actors will reorganize themselves to land on the exempt side.
This is the core of the dispute. Backers describe a precise shield for developers. Opponents describe a template criminals can copy.
A definition fight that reaches beyond DeFi
KYC and AML rules are the floor that the regulated side of crypto is built on. Every licensed exchange, on-ramp, and card issuer collects identity data and screens transactions because the law classifies them in a way that requires it. That baseline is also what lets compliant products operate inside the banking system at all.
A debate over who must verify identity therefore touches more than mixer operators and DeFi front ends. It shapes the compliance expectations that sit under the entire crypto card and spending stack, where issuers lean on verified-identity rails to move between crypto and fiat. The same tension shows up at the consumer edge, where demand for lighter onboarding runs straight into the AML obligations regulators expect providers to meet. If federal law softens the definition for one category, the pressure to keep a consistent standard across the rest of the market grows, not shrinks.
There is also a sequencing problem for the United States specifically. The CLARITY Act has been positioned as the bill that finally settles the SEC-versus-CFTC jurisdiction question for digital assets. Bundling a contested AML carve-out into that vehicle means a single provision could either slow the broader bill or ride through on its momentum. Law enforcement raising the alarm now, in public, is an attempt to force the question before a floor vote rather than after.
The state of play
As of June 24, 2026, this is a warning, not a change in law. Section 604 is text in a bill that is still moving, and the law enforcement objection is a lobbying signal aimed at lawmakers weighing amendments. Nothing about current KYC or AML obligations has shifted for any operating business.
The realistic outcomes are narrow. Drafters could tighten the language so the exemption clearly reaches only genuine non-custodial developers and not services dressed as software. They could add reporting requirements that survive the reclassification. Or the provision could pass as written, in which case the test will be litigated case by case as prosecutors and operators argue over who actually controlled the funds. For anyone building or using regulated crypto products, the practical takeaway is to watch the markup stage of the CLARITY Act, because that is where the definition either gets fenced in or left open.
Overview
Four US law enforcement organizations have warned that Section 604 of the CLARITY Act could exempt some crypto participants from KYC and AML requirements by narrowing the definition of a money transmitter. Supporters say it only shields non-custodial software developers and leaves criminal statutes intact. Investigators counter that removing money transmitter status strips the front-line reporting layer and hands DeFi-style operators a way to dodge oversight. As of June 24, 2026, it remains a contested provision in a moving bill, and the markup stage will decide whether the carve-out is fenced in or left open.
