Notice-and-Comment Rulemaking

SEC Chair Paul Atkins has signaled the agency will pursue formal rulemaking to clarify how traditional securities definitions apply to decentralized finance platforms and blockchain-based trading systems, marking a potential departure from years of enforcement-first regulation. The shift could reshape how U.S. and global regulators treat on-chain markets, with immediate implications for institutional investors assessing the stability and legal standing of DeFi protocols.

• SEC Chair Atkins called for notice-and-comment rulemaking to redefine “exchange,” “broker,” and “clearing agency” for blockchain systems
• Atkins identified crypto vaults earning passive yield as requiring additional regulatory clarity from the SEC
• The SEC signaled willingness to use exemptive authority where necessary, departing from Gensler-era enforcement focus

• Formal rulemaking Process Atkins proposed versus Gensler’s enforcement-first regulatory approach
• Three categories of legal definitions the SEC plans to revisit through structured process
• Global standard SEC guidance effect, even for protocols headquartered outside the United States

SEC Chair Paul Atkins used remarks delivered Friday at the Special Competitive Studies Project AI+ Expo in Washington to announce that the Securities and Exchange Commission intends to undertake formal notice-and-comment rulemaking aimed at clarifying how existing securities law applies to decentralized finance platforms and blockchain-based trading infrastructure.

The move represents a significant tactical shift from the enforcement-focused posture that dominated the SEC under former Chair Gary Gensler, whose tenure from 2021 through 2024 generated a series of high-profile cases against crypto exchanges, token issuers, and DeFi projects without necessarily advancing formal regulatory definitions.

Atkins’ comments suggest the SEC now views the legal ambiguity surrounding on-chain markets not as a gap that existing rules already cover, but as a genuine policy gap requiring new or updated regulatory treatment.

Atkins Argues Existing Securities Rules Cannot Cleanly Map to On-Chain Market Infrastructure

In his Friday remarks, Atkins made a technical argument that cuts to the core of why crypto regulation has been contentious: traditional securities definitions were built for centralized financial intermediaries, not software protocols that execute multiple market functions simultaneously through code.

The SEC chair noted that modern on-chain systems can combine trading execution, settlement, liquidity routing, and collateral management in ways that do not organize themselves “neatly along” the categorical lines of broker, exchange, or clearing agency that exist in U.S. securities law.

Software applications today do not always organize themselves neatly along these categorical lines.

Paul Atkins, SEC Chair

This framing matters because it implicitly accepts a critique the crypto industry and some legal scholars have raised for years: that applying 1930s-era definitions to 2024 software infrastructure produces legal outcomes that neither market participants nor regulators find workable.

Under Gensler, the SEC largely took the position that existing rules already applied to most crypto activity without modification, which led to case outcomes in which platforms and protocols were found to have violated securities laws despite not obviously fitting the structural definition of a broker or exchange.

Atkins appears to be signaling openness to the idea that some on-chain activities warrant new regulatory categories or exemptions rather than forced application of legacy legal definitions.

The three specific legal categories Atkins identified for rulemaking are “exchange,” “broker,” and “clearing agency.” Each carries distinct regulatory obligations under the Securities Exchange Act of 1934 and related rules. An exchange must register with the SEC, maintain surveillance systems, and follow detailed operational rules.

A broker must maintain net capital requirements, conduct suitability assessments, and comply with trade execution standards. A clearing agency must manage settlement risk, maintain capital buffers, and oversee member defaults.

How the SEC defines which on-chain functions trigger which obligations will determine whether DeFi protocols face registration requirements or whether they can operate under exemptions or alternative regulatory pathways.

Crypto Vaults and Yield Products Flagged as Needing Explicit Regulatory Guidance

Atkins also identified a second regulatory priority: on-chain applications that allow users to deposit assets and earn passive yield, often referred to as crypto vaults or yield farming platforms.

The SEC has not issued comprehensive guidance on whether such products constitute investment contracts, which would require registration under the Investment Company Act of 1940, or whether they fall outside the securities regulatory perimeter altogether. That uncertainty has left both platforms and institutional investors in a gray zone, unsure whether participation carries regulatory risk.

The mention of crypto vaults signals that Atkins intends to broaden the rulemaking scope beyond trading infrastructure to include yield generation products that have become a significant component of DeFi by total assets.

This is material for institutional allocators because yield products often target large capital bases seeking modest but consistent returns; clarity on whether they require fund registration or other compliance measures will affect both the supply of such products and the ability of large institutions to participate without regulatory friction.

The SEC Chair also stated the agency should consider using its exemptive authority “where necessary and prudent,” which opens the door to tailored relief for specific on-chain market structures rather than forcing all DeFi into a single regulatory mold.

The explicit mention of exemptive authority represents a tangible tool that was de-emphasized during the Gensler years, when the SEC rarely granted relief specific to crypto products.

Rulemaking Timeline and Global Regulatory Synchronization in Motion

The SEC has not yet announced a timeline for initiating notice-and-comment rulemaking, but Atkins’ remarks have been viewed across the industry as a signal that such a process is imminent rather than speculative.

The notice-and-comment framework itself typically requires 60 to 90 days for the public to submit written input, followed by SEC review and drafting of final rules, a process that can extend from 12 to 24 months depending on complexity and political attention.

For institutional investors, this timeline matters because regulatory clarity often precedes large allocations to emerging market segments; funds managing multi-billion-dollar portfolios typically avoid concentrated exposure to assets or protocols operating in regulatory limbo.

The SEC’s move toward formal rulemaking also coincides with a broader global trend toward structured cryptocurrency oversight. The European Union’s Markets in Crypto Assets Regulation, or MiCA, which took effect in December 2023, established a multi-tiered classification system for digital assets and imposed licensing requirements on crypto service providers.

Singapore’s Monetary Authority and the Financial Services Regulatory Authority of Dubai have both launched licensing regimes for crypto exchanges, custody providers, and token issuers. These jurisdictions have not waited for the United States to move first; instead, they have established frameworks independently, creating a fragmented global regulatory landscape.

However, institutional market participants acknowledge that SEC guidance carries outsized weight in global crypto markets because of the centrality of U.S. dollar liquidity, American institutional capital, and banking infrastructure to the crypto ecosystem.

Large exchanges and DeFi protocols that generate substantial revenue from U.S. users or maintain banking relationships tied to American financial institutions typically align their compliance posture with SEC expectations even if they are not directly subject to U.S. jurisdiction.

As a result, Atkins’ rulemaking initiative is likely to influence how regulators in other major financial centers approach the same questions, either by adopting similar definitions or by explicitly harmonizing their frameworks with U.S. outcomes.

Earlier this year, the SEC and Commodity Futures Trading Commission jointly published a digital asset classification framework grouping assets into categories including digital commodities, stablecoins, digital collectibles, and digital securities.

Institutional Investors Awaiting Clarity on Compliance Pathways for DeFi Exposure

For institutional allocators, the Atkins framework opens a critical question: which DeFi protocols or on-chain market structures will emerge as SEC-compliant after formal rulemaking completes, and which will face registration requirements that make them operationally impractical or economically unviable?

Protocols that currently operate in legal gray zones, such as decentralized exchanges that do not custody assets but route liquidity algorithmically, or yield platforms that distribute returns algorithmically without human discretion, face the prospect of either formal compliance obligations or explicit exemptions.

The gap between those two outcomes determines whether institutional capital will flow into those markets at scale.