On May 14, 2026, the U.S. Senate began deliberation and markup of the CLARITY Act, regarded as critical legislation for cryptocurrency asset regulation. Right from the start of the hearing, issues related to anti-money laundering, sanctions enforcement, and compliance clarity took center stage: Senator Jack Reed pointed out that Iran is raising funds through cryptocurrency and converting a large portion of that money into tokens pegged to the dollar for procuring sensitive goods and supporting drones operating in the Persian Gulf; Treasury Secretary Scott Bessent emphasized that traditional energy sanctions are under high pressure, citing that Iran's oil storage is nearly full, and no tankers have loaded Iranian crude oil for about three days, while on-chain financing is becoming a new loophole. Subsequently, Elizabeth Warren targeted Tornado Cash, questioning how open-source, automated decentralized protocols fit into existing anti-money laundering and sanctions tools, while also suggesting that CLARITY might "not be tough enough" in combating money laundering and sanctions evasion. Under such a narrative, from Iranian cryptocurrency financing to the regulatory boundaries around Tornado Cash, as well as the plans by Coinbase and Circle to integrate USDC into Hyperliquid AQAv2, everything has been grouped into the same national security and financial compliance framework, signaling that in the future, the regulatory boundaries for cryptocurrencies and the costs of industry compliance in the U.S. may no longer be defined by technological innovators, but rather redefined by the sanctions system and legislators.

Iran's Cryptocurrency Financing Named

During the hearing, Jack Reed shifted the topic from abstract "risks" to specific hostile targets: he stated that Iran is using cryptocurrency to raise funds and emphasized that these funds "have largely been converted into tokens pegged to the dollar," which are then used to procure sensitive goods and support drones operating in the Persian Gulf. Over the past few years, there have been numerous reports about Iran using cryptocurrency to evade financial sanctions, but having this presented in the context of CLARITY legislation effectively elevates it from media narrative to legislative rationale, contrasting with Treasury Secretary’s assertion that "Iranian oil exports are blocked and storage tanks are nearly full"—one side is high pressure from halted tankers, while the other is a gray area of on-chain dollar flows.

Within this narrative framework, cross-border cryptocurrency flows are no longer just a financial innovation topic, but are tagged as a "national security variable," significantly raising Washington's regulatory expectations regarding funds related to sanctioned entities. Those directly affected are primarily the issuing institutions providing dollar-pegged token services to global users, followed by compliant trading platforms facilitating these tokens and payment channels handling cross-border settlements: once wallets, traders, or flows of funds related to Iran are deemed by legislators as part of "on-chain sanction loopholes," these institutions will be required to assume higher scrutiny and interception responsibilities in the issuance, listing, and settlement processes, with the trajectory of CLARITY determining whether this responsibility is embedded into a unified framework, or passively increased through case-by-case enforcement and sanction lists.

Oil Blockade and Sanction Gaps

In the same discussion where senators brought "on-chain dollar tokens" to the forefront, Treasury Secretary Scott Bessent used a set of hard figures to remind everyone that the U.S. still holds a chokehold on traditional sanction tools. He noted that due to the U.S. government's blockade of Iranian oil exports, Iran's oil storage is nearly at capacity, and no tankers have left port loaded with Iranian crude oil in the past three days. In the vital oil artery of the Strait of Hormuz and surrounding waters, tankers are indeed being grounded, and this visual "zero-loading" effect is the most intuitive example of "sanction effectiveness" mentioned by legislators, providing a reference point for their demand that cryptocurrency assets bear the same level of compliance constraints.

However, while Iranian crude oil is trapped in storage and ports, regional trade has not completely frozen. The Vitol Group has started transferring Iraqi Basra crude oil to its customers via ship-to-ship transfers, with some shipments already leaving the Persian Gulf; physical trade rapidly finds alternative supply routes under high-pressure sanctions. For regulators, this situation constitutes a new, delicate balance: on the physical level, flows through Hormuz have shifted from "Iranian crude oil" to "Iraqi crude oil"; on the financial level, the sanctioned party is being pointed out as attempting to raise funds through cryptocurrency channels, converting the funds into tokens pegged to the dollar for procuring sensitive goods and supporting drone activities in the Persian Gulf. Traditional energy blockades prove that the U.S. can erect "hard borders" in the strait, while cryptocurrency channels are seen as a "sanction gap" that is still not entirely sealed; whether CLARITY will tighten this gap to the same standard as that of Hormuz has become a focal point of disagreement at the hearing.

Tornado Cash as a Negative Example

In the debate over whether the sanction gap should be "sealed shut," Elizabeth Warren directly pointed the finger at Tornado Cash. She reminded the present senators that this protocol, which has already been included on the sanctions list by the U.S. Treasury Department's Office of Foreign Assets Control, is not a traditional institution with a front office, counter, or compliance officer, yet still provides a channel for on-chain anonymity, exposing the limitations of existing anti-money laundering and sanctions tools in the face of decentralized protocols. Her questions are not just targeting one project, but using Tornado Cash to inquire: in the absence of visible operational entities and points that can be shut down, who can the current rules actually hold accountable?

The debate surrounding Tornado Cash has also been distilled by her into several sharp legal boundary questions: does merely publishing open-source code and deploying automated smart contracts constitute "providing financial services"; under the premise that the protocol operates without human intervention, who can be identified as a "service provider"; and to what extent do those maintaining the front-end interface and operating the website bear responsibility for users' potential money laundering activities. The CLARITY Act attempts to provide clearer definitions for "financial intermediaries" and "service providers," but during the hearing, whether these definitions would encompass mixing protocols, privacy tools, and even DeFi developers as part of regulatory obligations has become an implicit core issue: the extent to which code and developers are drawn into the anti-money laundering and sanctions compliance system will determine whether future on-chain anonymity tools are treated as regulatory peripheral infrastructure or pushed into high-risk, potentially unapproachable regulatory gray areas.

Who Is Affected under the CLARITY Act

It is clear from the hearing that CLARITY is not being tabled to "warm the industry," but to write the framework of anti-money laundering and sanctions enforcement into a dedicated cryptocurrency act. Research briefs have already defined it as a key legislative attempt within the U.S. cryptocurrency asset regulatory framework, but it has also faced criticism for being "potentially not tough enough" on anti-money laundering and sanctions, especially in the face of decentralized protocols and anonymity tools. Jack Reed presented how Iran utilizes cryptocurrency and converts a large part of the funds into dollar-pegged tokens for procuring sensitive goods and supporting drones in the Persian Gulf, while Elizabeth Warren used Tornado Cash to question: do open-source, automated contracts qualify as "financial services"? Their inquiries are, in fact, drawing lines—centralized platforms, dollar-pegged token issuers, and the developers and front-end operators around anonymous protocols, who will bear heavier anti-money laundering and sanctions responsibilities.

Under this framework, traditional centralized platforms are first viewed as entities that should be "visible and reachable"; regulatory expectations are that they must assume customer identification, sanctions screening, and risk reporting obligations similar to traditional financial institutions. The subject pointed out by Reed is the issuers of dollar-pegged tokens: if identified as the preferred transfer tools for sanctioned parties like Iran, the issuers of dollar-pegged tokens will inevitably be required to strengthen identity checks, list screenings, and on-chain flow monitoring; institutions that connect these tokens to derivatives platforms will also be placed on the same responsibility chain. The push by Coinbase and Circle to integrate USDC into Hyperliquid's AQAv2 sits right on the boundary of this new and old order: on one side, compliant institutions hope to expand their business landscape through on-chain infrastructure; on the other, CLARITY and related rules may require them to conduct finer screening and continuous monitoring of participants before funds enter on-chain derivatives platforms. As for DeFi front-ends and developers, whether they will ultimately be classified as "service providers" in the final text is still undecided, but the debate surrounding Tornado Cash has already placed a blade over their heads: what CLARITY ultimately cuts into could be whether "code can be treated as a neutral tool," or if they must assume accountable compliance obligations for every dollar flow passing through their interfaces.

Changes and Risks After Redrawing the Compliance Red Line

From Iran using dollar-pegged tokens to fund drones in the Persian Gulf to Tornado Cash being named as a blind spot in sanctions, this CLARITY hearing has effectively pulled the security narrative originally packaged as "financial innovation" and "inclusive finance" back into the coordinates of national security and sanctions enforcement. Treasury Secretary Scott Bessent's remarks about Iranian oil exports being blocked and tankers idling, along with Vitol rerouting Iraqi Basra crude oil through ship-to-ship transfers, indicate that offline sanctions have tightened to the limit; under this backdrop, cryptocurrency assets are naturally viewed as potential "pressure relief valves" within the sanctions system, raising the political sensitivity to an unprecedented height. CLARITY is still in the negotiation phase; the briefs deliberately avoid touching on the final voting and amendment details, instead reflecting the greatest uncertainty: whether this newly drawn red line will pressure protocol developers and front-end operators or fall more heavily on platforms and specific asset categories. What can be confirmed is that the debate surrounding Iranian fund flows and Tornado Cash has elevated compliance thresholds from "investor protection" to "preventing sanctioned entities and terrorist financing," forcing platform operators, protocol developers, and end users to reconfigure legal risks under U.S. jurisdiction—preemptively aligning with sanction lists and anti-money laundering monitoring, reserving mechanisms to freeze and exclude high-risk counterparties, and scrutinizing each aspect of product structures that may be deemed as aiding in sanctions evasion. Including institutions like Coinbase and Circle, which pride themselves on being "compliant," as they push to integrate USDC into new infrastructures like Hyperliquid, they must also assume that CLARITY will place on-chain dollar flows under a more stringent review framework, before the uncertain text settles, whoever can first reshape their compliance boundaries in line with national security logic will have the qualification to remain in this newly redrawn lane.

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