After weathering the largest security breach in its history last week, the crypto market is firmly focused on the U.S. midterm elections.

At stake: The development of crypto regulation. The Clarity Act, a bill that would have helped usher digital assets into the mainstream financial system, failed to advance in Congress earlier this year--mainly as Democrats and Republicans remained divided over curbs on President Trump's crypto investments.

Markets are anticipating Democrats taking control of at least one legislative chamber, weakening Trump's power.

A Democratic sweep of both the House and the Senate could prompt an investor flight from riskier assets like crypto, at least in the near term, while the turbulence caused by an uncertain outcome could also weigh on crypto and other high-volatility assets, market watchers said.

--

Clarity Act Comeback Could Face Challenges

In September, the crypto-friendly Clarity Act ran aground in the Senate after Democrats declined to back the legislation. A Democratic sweep would reduce the prospect of legislators reviving the bill.

With progress in Congress stalled, the Securities and Exchange Commission and the Commodity Futures Trading Commission have picked up the mantle, advancing a regulatory framework that industry players hope will speed institutional adoption and standardize trading practices.

However, proponents of the Clarity Act had hoped it would provide the nascent crypto industry with a permanent rulebook, something agencies alone can't do.

"The regulators are currently giving the guidance as they see it and how they're going to enforce it, but there is a risk that a future administration can say, 'No, that interpretation was wrong, we're going to change it, and you can't do these things anymore,'" said Stephen Coltman, head of macro at crypto exchange-traded product provider 21Shares.

A Democratic win in the Senate could affect the makeup of the SEC and CFTC given the upper chamber's role in voting on presidential appointments to the agencies, said Alice Liu, head of research at CoinMarketCap.

"Under a Democratic Senate, confirmations for the remaining commission seats become the lever to watch," said Liu.

Investors should also watch for oversight investigations led by a Democrat-controlled House that could impact the crypto industry, Liu said.

--

Election Uncertainty and Market Turbulence

Uncertainty around the election outcome could add to short-term market volatility, especially if the result is contested, asset manager WisdomTree's director of digital asset research Dovile Silenskyte said.

However, the elections could pose longer-term risks to crypto prices if a gridlocked Congress results in policy uncertainty that has a broader chilling impact on markets, she said.

"The real risk is if election uncertainty turns into a long stretch of policy uncertainty, because that's what keeps investment on the sidelines," Silenskyte said.

Crypto assets steadied heading into the vote, with bitcoin hovering around $77,000 amid a broader market pullback from risk. Ether nudged higher at around $2,260 in early trade Tuesday.

Crypto-related assets--including digital asset-hoarders and trading platforms--are still smarting from last week's $6.3 billion hack of Binance, the world's largest crypto exchange. Bitcoin remains around 5% lower than its level before the hack, while shares in crypto platforms Hyperliquid Strategies and Coinbase are yet to recover.

Tokens linked to Trump--including the president's official $TRUMP coin--face the greatest risk from congressional oversight, though they have already lost most of their value, CoinMarketCap's Liu said.

However, the impact of the midterms on digital assets shouldn't be overstated, 21Shares' Coltman said.

"There's so many things going on, I think for crypto, the midterms are quite a small factor at the moment," the macro strategist said. "What happens with Iran and then what happens with the Anthropic IPO and tech spending in general, I think those are the big things driving the markets."