Regulatory Analysis
Responsible Regulatory Innovation
Title V — Sandbox, International Coordination & Tokenization
Digital Asset Market
Clarity Act
Sections 501–508
January 2026
Executive Summary
Title V establishes a joint SEC-CFTC regulatory sandbox for small firms testing innovative fintech products, mandates interagency studies on automated compliance and tokenization, and creates international coordination frameworks for digital asset regulation. §501 requires the Commissions to establish the Micro-Innovation Sandbox within 360 days. §505 addresses tokenization of real-world assets and financial instruments, requiring parity treatment with underlying instruments. §507 mandates Treasury's National Strategy for International Digital Asset Illicit Finance within 270 days. Title V creates no immediate compliance obligations for operating companies—the sandbox is voluntary, and remaining provisions are study-oriented.
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CFTC-SEC Micro-Innovation Sandbox [§501]
Eligible Firm Requirements [§501(c)(1)]
US-based persons meeting all requirements: (A) approved application; (B) lawful innovative activity in US; (C) no statutory disqualification under SEC §3(a), CFTC §8(a)(2), or state law; (D) no fraud conviction; (E) agrees to Commission jurisdiction; (F) designates point of contact; (G) ≤25 employees; (H) ≤$10M annual gross revenue.
Innovative Activity Definition [§501(a)(4)]
New/emerging technology or novel application (including AI) that: (A) provides financial product, service, business model, or delivery mechanism; and (B) lacks (i) substantially comparable US analogue in common use, and (ii) analogous federal regulatory regime.
State Preemption [§501(k)]
Sandbox participation supersedes state securities/commodities registration requirements. State anti-fraud enforcement and laws of general applicability (banking, consumer protection, contracts, property, criminal) preserved. States may require notice filings consistent with Securities Act §18(c).
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Sandbox Parameters & Limits
Participation Requirements
2-year maximum participation [§501(f)(1)]
1-year extension if pursuing exit in good faith [§501(f)(2)]
Semi-annual progress reports required [§501(e)(3)]
Public website posting of application materials [§501(h)]
Must state exit objective (registration, exemptive order, no-action letter, or rulemaking petition) [§501(e)(1)(F)]
SROs must recognize sandbox conditions [§501(g)(4)]
Activity Ceilings [§501(d)]
$20M aggregate customer/investor/counterparty funds maximum
20 projects/year per Commission
Anti-fraud laws remain in full force
No exemption from state anti-fraud provisions
180 business day application decision deadline [§501(e)(2)]
Commissions may disqualify/revoke at any time for non-compliance [§501(g)(5)]
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Tokenization Framework [§505]
Parity Principles [§505(e)]
Tokenized financial instruments treated identically to underlying instrument for all regulatory purposes
No waiver/modification of requirements solely because instrument uses DLT [§505(e)(2)]
Security status unchanged by tokenization [§505(h)(1)]
Real-world asset tokenization does not alone create security status [§505(h)(2)]
State property transfer laws preserved [§505(h)(5)]
Misrepresentation Prohibitions [§505(d)]
Unlawful to claim tokenized RWA "equals" underlying without conferring same legal/economic rights
Tokenized financial instruments cannot be marketed as equivalent unless: (A) substantially equivalent rights; (B) full legal compliance; (C) ownership records maintained per §106; (D) DLT meets accuracy/settlement finality standards
SEC enforces via Exchange Act §10(b) [§505(g)(1)]
CFTC enforces via CEA §6(c)(1) [§505(g)(2)]
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Regulatory Mandates
| Section | Regulator(s) | Requirement | Deadline |
|---|---|---|---|
| §501 | SEC + CFTC (joint) | Establish CFTC-SEC Micro-Innovation Sandbox via joint notice-and-comment rulemaking; maintain and publish eligible activities list updated every 2 years | 360 DAYS |
| §503 | GAO | Study distributed ledger-based compliance tools for disclosures, real-time reporting, AML/sanctions screening; recommend pilot programs; benchmark international efforts | 1 YEAR |
| §504 | All Federal Financial Regulators | Reports on implementation of Act and legislative recommendations; submitted to appropriate committees of Congress | 1 YR, THEN EVERY 3 YRS FOR 12 YRS |
| §505 | SEC + CFTC (joint) | Comprehensive study of tokenized real-world assets regulatory treatment; address verification, custody, audit, fraud; may initiate rulemaking after study completion | 360 DAYS (STUDY) |
| §506 | NIST Director | Promote voluntary adoption of post-quantum cryptography standards; provide technical assistance to high-risk entities; submit implementation reports | BIENNIAL THROUGH 2035 |
| §507 | Treasury (lead) + State, DOJ, DHS | National Strategy for International Digital Asset Illicit Finance; assess global vulnerabilities; set multilateral engagement goals; identify AML/CFT standards | 270 DAYS |
| §508 | Treasury | Annual report listing top 20 foreign jurisdictions by digital asset trading volume; assess AML/sanctions compliance; identify deficient jurisdictions and remediation actions | 1 YR, THEN ANNUALLY FOR 4 YRS |
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Implementation Timeline
270
Days Post-Enactment
§507 National Strategy for Illicit Finance due to Congress
360
Days Post-Enactment
§501 Sandbox established; §505 Tokenization study complete
1 Yr
Post-Enactment
§503 GAO RegTech study; §504 First implementation reports; §508 First foreign jurisdiction report
2035
Final Reports
§506 Final NIST quantum cryptography report due
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Studies & International Coordination
§502 International Cooperation
SEC/CFTC shall consult with foreign regulators, enter info-sharing arrangements, pursue reciprocal treatment for US firms, advocate for technology-neutral open standards preserving self-custody and privacy; may establish cross-border sandboxes
§503 Automated Compliance Study
GAO study of DLT-based compliance tools covering: statutory disclosures, real-time reporting, AML/sanctions screening, interoperability across agencies, cost/benefit analysis for entities of different sizes, international benchmarking
§506 Post-Quantum Cryptography
NIST to promote voluntary adoption of post-quantum standards; provide guidance, technical assistance to critical/digital infrastructure providers; solicit industry input on adoption challenges; reports due biennially through 2035
§507 Illicit Finance Strategy
Treasury-led interagency initiative: engage foreign counterparts on AML/CFT controls, identify jurisdictions of concern, support technical assistance programs, annual progress reports to Congress identifying cooperative/non-cooperative jurisdictions
§508 Foreign Jurisdiction Reports
Annual Treasury report: list top 20 jurisdictions by digital asset trading volume, assess AML/sanctions compliance vs. §507 standards, identify deficiencies, describe remediation efforts; unclassified with classified annex permitted
§505(c) Tokenization Study Contents
Joint SEC/CFTC study must address: verification/custody/audit standards, qualified third-party custodian criteria, fraud prevention, federal jurisdictional treatment, state/international interaction, consumer protection, interagency coordination
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Key Cross-References & Definitions
Within Bill
• §106, §107: Recordkeeping modernization (referenced by §505(d)(2)(C)-(D), §505(f)(3))
• §905: General effective date (360 days post-enactment)
• §701: Bankruptcy protections (digital commodities as customer property)
Existing Law
• Securities Exchange Act §3(a), 15 U.S.C. 78c(a): Statutory disqualification definition
• Commodity Exchange Act §8(a)(2), 7 U.S.C. 12(a)(2): CFTC disqualification standard
• Securities Act §18(c), 15 U.S.C. 77r(c): State notice filing authority preserved