Senator Cynthia Lummis said the CLARITY Act is intended to prevent a repeat of the 2022 Terra collapse, which wiped out roughly $40 billion and sent shockwaves through the crypto sector as companies failed and users lost funds they could not recover.

The proposed legislation would draw a clearer distinction between stablecoins and digital assets backed by reserves and algorithmic tokens that do not have the same backing. It would also add protections for customers if a crypto company enters bankruptcy.

In a post on X, Lummis pointed to Terra as an example of why stronger rules are needed. She wrote: “Terra’s collapse wiped out roughly $40 billion, and much of what remained got swallowed by the bankruptcy process itself. The Clarity Act doesn’t just draw a line between reserve-backed assets and algorithmic experiments. It makes sure that when something fails, customer assets…” — Senator Cynthia Lummis (@SenLummis), July 22, 2026. https://x.com/SenLummis/status/2079900767511789681?ref_src=twsrc%5Etfw

Lummis argued that the CLARITY Act separates reserve-backed digital assets from algorithmic experiments and creates bankruptcy protections that prioritize customers rather than treating their holdings as company assets.

Those bankruptcy provisions have become one of the bill’s most closely watched areas. Crypto journalist Eleanor Terrett reported that Senate Republicans released an updated version of the CLARITY Act after briefing calls with industry stakeholders. According to Terrett, the revised text includes changes related to ethics rules, the Blockchain Regulatory Certainty Act (BRCA), and the treatment of digital assets in bankruptcy.

One section drawing particular attention addresses what happens when a crypto exchange or custodian files for bankruptcy. The updated bill states that customer-owned digital assets should remain the property of customers instead of becoming part of the bankrupt company’s estate.

Terrett wrote on X: “Bankruptcy protections: While not a new section, it’s worth highlighting that the bill lays out rules for how digital assets would be treated if an exchange or custodian went bankrupt. It helps ensure customer assets receive the same protections as traditional financial assets…” — Eleanor Terrett (@EleanorTerrett), July 22, 2026. https://x.com/EleanorTerrett/status/2079962543691542557?ref_src=twsrc%5Etfw

That approach reflects protections commonly available in traditional financial markets, where client assets are generally separated from company funds. The proposal also responds to concerns raised after the collapse of FTX. During FTX’s bankruptcy process, millions of customers faced lengthy legal proceedings to recover assets that had been held on the failed exchange. Similar customer property disputes arose in the 2022 bankruptcies of Celsius Network and BlockFi, where courts had to determine whether user deposits counted as customer property or general estate assets.

Under the CLARITY Act framework described in the updated draft, digital assets held in custody would receive stronger legal recognition as customer property. Supporters say that structure would reduce uncertainty if another large crypto platform fails.

The CLARITY Act has not yet become law. Senate Republicans held discussions with crypto industry participants earlier in the day to work through details, and the new draft is now part of the continuing legislative process. Ethics rules for politicians remain part of the debate as lawmakers seek broader support. The bill is one of several crypto-related proposals moving through Congress, including separate stablecoin and digital asset market structure legislation, as lawmakers attempt to establish a clearer regulatory framework for the sector.

The bill’s current version focuses on two issues highlighted by the Terra and FTX failures: distinguishing reserve-backed stablecoins from algorithmic tokens and clarifying bankruptcy rules so customer assets are not automatically absorbed into a failed company’s estate. Whether those provisions remain in the final version depends on further negotiations in Congress.