Letitia James Warns the Clarity Act Would Gut State Fraud Fights

New York Attorney General Letitia James told a Senate committee this week that the Digital Asset Market CLARITY Act would gut state crackdowns on crypto fraud, calling federal preemption of state law “a mistake.” State and local police make roughly 98.8% of arrests nationwide, she testified, versus about 1.2% for federal agencies. Her warning, first reported by the crypto outlet CoinGape, lands days before the Senate may force a floor vote on the bill.

James is not the first regulator to raise this alarm. The North American Securities Administrators Association (NASAA, the umbrella group representing securities regulators across all 50 states, Canada and Mexico) sent Congress a nearly identical warning back in February, five months before Washington’s floor vote scramble reached this week’s pitch.

A Warning NASAA Raised Months Before James Did

NASAA’s letter to Senate leadership went out on February 25, 2026. The group said it supports “responsible innovation” but wants Congress to preserve state authority over licensing and anti-fraud enforcement as the bill moves forward.

Its objections track James’s almost line for line. The group warned that bad actors could exploit “selective text” written into the bill, creating what it called “enforcement gaps” that fraud victims would have to live with. It also asked Congress to maintain “regulatory parity” for tokenized assets so state investigators keep their existing anti-fraud and investigative powers.

1. February 25, 2026: NASAA sends its letter to Senate leadership asking Congress to preserve state authority over digital asset enforcement.
2. May 14, 2026: The Senate Banking Committee passes the CLARITY Act 15 to 9, after more than 130 amendments, 44 of them from Senator Elizabeth Warren alone.
3. Mid July 2026: Senators Chris Murphy, Chris Van Hollen and Jeff Merkley oppose a merged draft that dropped the ethics language Democrats wanted.
4. This week: Letitia James testifies against the bill’s preemption language.
5. Around August 7: The Senate’s August recess is set to begin, the deadline Majority Leader John Thune is racing to beat.

Nine months separate NASAA’s first letter from this week’s testimony. In that stretch the bill picked up momentum, a committee vote and Wall Street backing. The state regulators’ objection never moved.

What Would the Clarity Act Preempt?

The CLARITY Act would split oversight of digital assets between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), building a federal framework that could override state securities and consumer protection laws covering the same activity. Preemption is the legal principle that federal law blocks state law in that shared space, exactly the outcome James told senators to reject.

Formally, the bill is H.R. 3633, the 119th Congress’s Digital Asset Market CLARITY Act. In written testimony, James said the bill “seeks to interfere with and preempt states’ investor protection laws and dilute their ability to prosecute fraud.”

Despite this, CLARITY would neuter state and local law enforcement by preempting states and preventing them from fully prosecuting rampant fraud and violations of law by actors in the cryptocurrency marketplace.

Letitia James, New York Attorney General, in written testimony to a Senate committee.

Her arithmetic is the center of the argument. State and local law enforcement handle about 98.8% of arrests across the country, she said, while federal authorities handle roughly 1.2%. Take state jurisdiction away, in her framing, and the agencies doing nearly all the actual policing lose authority over an entire asset class.

New York’s Own Case File

James’s office is not a bystander in this fight. It has spent years building the enforcement record that a preemption clause would apply to. In a press release urging Congress to strengthen oversight, her office laid out that track record.

• NovaTechFx, June 2024: James sued the trading company over an alleged pyramid scheme that defrauded hundreds of thousands of investors worldwide, including more than 11,000 New Yorkers, out of over a billion dollars in cryptocurrency.
• Tether, 2021: Her office brought what it calls the first and only enforcement action against the largest stablecoin issuer, over allegations it covered up major financial losses.
• Genesis, 2 billion dollar settlement: Tied to the collapsed Gemini Earn program, requiring funds returned to investors and barring Genesis from operating in New York.
• Coin Cafe, Gemini and KuCoin: Tens of millions of dollars in refunds and fines for violating New York law or failing to protect investors, per the attorney general’s office.

Every one of those cases ran through state law, state courts or state settlement authority. NASAA and James both argue a federal preemption clause could have complicated, delayed or blocked several of them.

Democrats Add an Ethics Fight to the Mix

State enforcement power is not the only sticking point. Democratic senators say the CLARITY Act’s ethics provision leans too heavily on one federal agency.

The bill, as currently drafted, includes temporary ethics restrictions on digital asset activity by senior federal officials. Democrats argue the Department of Justice (DOJ) cannot be the sole enforcer of that rule and want state prosecutors given power to enforce it too, the same argument James makes about fraud enforcement generally.

Senators Chris Murphy, Chris Van Hollen and Jeff Merkley formally opposed a merged draft after it dropped the ethics language they had demanded. Senator Thom Tillis, a Republican working on the compromise, said the ethics deal is “not quite there.”

The Floor Fight Squeezing Clarity’s Calendar

Time is the other constraint. Senate Majority Leader John Thune has said he may bring the CLARITY Act to the floor before the August recess, regardless of whether Republicans have the 60 votes needed to invoke cloture.

Republicans hold 53 Senate seats, so they need roughly seven Democratic votes to clear that threshold. The bill is also competing for floor time against the SAVE America Act and a Russia sanctions bill, either of which could take priority.

Banks are lobbying hard over the bill’s stablecoin yield language. Senators Angela Alsobrooks and Thom Tillis have floated a compromise banning bank deposit style yield while preserving activity based rewards, but the American Bankers Association says that does not close the loophole letting crypto firms pay interest like returns. Thune told reporters the banking groups’ lobbying was shaping negotiations and said senators should expect a long list of amendments if cloture gets filed.

Days before James testified, Senator Cynthia Lummis released updated merged text combining the Banking and Agriculture Committee versions of the bill. Senator John Kennedy said, “If we don’t have a positive vote before the August break, I think the odds shift against us.”

Regulators outside Washington are not waiting on Congress. Vietnam has already moved to fine crypto traders while licensing five exchanges, consolidating its market on its own timeline.

The recess begins around August 7. Thune has not committed to an exact date for the vote.

Who Is Betting Clarity Gets Done Anyway

Despite the enforcement fight, major financial firms keep lining up behind the bill.

Charles Schwab, the brokerage overseeing roughly 13 trillion dollars in client assets, backed the CLARITY Act over the weekend. Jim Ferraioli, the firm’s director of digital currencies research and strategy, called it “a critical moment for the long-awaited Clarity Act” and said lawmakers “appear poised to finally drag the market structure bill across the goal line.”

Schwab has its own stake in the outcome. The firm rolled out Schwab Crypto this year, letting eligible clients buy Bitcoin and Ethereum directly, expanding from employees to eligible accounts across 48 states.

Goldman Sachs chief executive David Solomon has also backed the bill despite banking industry concerns over stablecoin yields. Ripple chief executive Brad Garlinghouse, Coinbase chief executive Brian Armstrong and Fidelity have urged the Senate to move as well.

Traders on Polymarket, a prediction platform that recently ran its own regulator test after a hack, put the odds of the bill becoming law this year at about 33%.

Thune has floated forcing cloture regardless of the vote count, a move that would trigger a fixed amendment window before any final passage. NASAA sent its warning in February. Five months later, the letter is still sitting in the Senate record, unanswered.