Bernstein analyst Gautam Chhugani weighs in on global digital assets following CLARITY Act failure.

The analyst commented: "Yesterday CLARITY Act failed to advance in a procedural cloture vote. Given the limited time window and the negotiations broke down over the ethics provision, we would not pin our hopes on a re-vote. Moving forward, we would expect the catalysts for the sector to be driven by specific rule-making by the CFTC/SEC. We also expect the rule-making to be aggressive and swift to make up for the time lost negotiating the CLARITY Act. We would be buyers of weakness in crypto stocks here - specifically stocks linked to continued adoption in new real-world products - tokenization, perp futures, stablecoins and prediction markets. Our preferred names are: HOOD, CRCL and FIGR.

How do we see the failure of CLARITY on near term and long term prospects for the industry? The CLARITY Act would have fool-proofed the industry against political regime shifts. The industry now expects regulatory clarity via agency regulation and innovation exemptions. Specifically, we would expect the following -

1. Token taxonomy for raising capital via native crypto tokens and exemption from securities classification; 2. Decentralized finance protocols and self custody infrastructure will continue to enjoy developer protections; 3. Innovation exemptions for equity tokenization and updated transfer agency rules for 24*5/7 trading onshore in the U.S - worth watching for specific rules around issuer consent for tokenizing equity. 4. faster approvals for realworld assets perpetual futures onshore including SEC/CFTC coordination to launch single stock perp futures; 5. Amendment of rules around federal sports event contracts and their classification as swaps.

Thus, we continue to see strong near to medium term earnings catalysts linked to specific product pipelines within our coverage. However, we would still be left with the 2028 U.S elections seen as potential tail risk with fears of regulatory unwinding. We could see near term momentum get stronger as we see swift product launches as the SEC/CFTC exemptions come through. And the industry would hope to reach critical scale across mainstream products such as tokenization, that would make it challenging to unwind should the political winds change.

Stablecoins should be just fine since they are governed by GENIUS and will continue to earn deposit like yields. The CLARITY compromise text prohibited yield on idle stablecoin balances and linked rewards to activity tiers. In absence of CLARITY, distribution partners such as Coinbase can continue to offer yield on idle stablecoin balances and thus stablecoins will continue to see demand as savings deposit proxies offering full treasury yield. This should be positive for USDC adoption; however, we could continue to see new yield based competition from new stablecoin entrants. Stablecoins are governed by the GENIUS Act and we think GENIUS compliant-market leaders such as Circle remain well positioned for broader financial services and payments adoption.

Within our coverage, we continue to like the following stocks with specific earnings catalysts unaffected by general crypto market softness - 1. Robinhood continues to see earnings traction driven by record volumes in prediction markets and recent launch of Robinhood chain. Robinhood chain offers stock tokens (in an offshore structure) and continues to see strong trading activity - current gross chain revenues at ~$1mn/day despite declining gas congestion fees. Q3/Q4 remains catalyst rich with a busy sports calendar and upcoming mid-term elections. 2. Circle is the regulated U.S market leader in stablecoins. Stablecoins are governed under the GENIUS Act and thus, not impacted by CLARITY failure. Investor positioning in Circle is driven by growth in USDC supply (which has remained resilient) and narrative around new stablecoin competition. Circle’s ARC chain launch is scheduled for today and could be a near term catalyst should it see a strong launch driving more demand for USDC liquidity towards trading, equity tokenization, DeFi yield vaults etc. 3. Figure is a credit tokenization market leader with strong traction in home mortgages. Figure’s business model has near-zero crypto exposure and should remain unaffected by CLARITY failure - although investors tend to trade it as part of the crypto basket. Further, recent Kiavi acquisition could be a future catalyst as Figure diversifies its credit business beyond HELOCs into residential transition loans and first liens."