Crypto regulation stalls as SEC steps up rulemaking push

On August 20, 2025, Federal Reserve Vice Chair Michelle Bowman made a landmark appearance at the SALT Conference, becoming the first Fed official to publicly endorse blockchain technology, tokenization, and stablecoins. This historic participation signaled a clear regulatory pivot from skepticism to engagement, reflecting a broader federal openness to integrating digital assets within the financial system. Industry leaders like Caitlin Long of Custodia Bank hailed this moment as a catalyst for innovation and the expansion of real-time payments, underscoring the potential for accelerated adoption of crypto solutions.

Complementing this symbolic endorsement, the Federal Reserve took concrete steps by easing banking restrictions tied to crypto activities, notably rolling back Operation Chokepoint 2.0 limits. This regulatory relaxation, supported by the OCC and FDIC, marked a significant shift away from enforcement-heavy tactics toward fostering a more inclusive environment for banks to engage with blockchain and digital assets. By reducing these barriers, the Fed effectively paved the way for broader institutional participation and signaled a growing acceptance of crypto as a legitimate component of the U.S. financial infrastructure.

The bipartisan momentum for comprehensive crypto legislation, exemplified by the CLARITY Act's repeated passage in the House and ongoing Senate negotiations on market structure bills, underscores a shared recognition of the urgent need for federal regulatory clarity. Industry leaders and regulators alike emphasize that while agencies like the SEC and CFTC are making strides, only a permanent legislative fix can safeguard these advances from reversal by future administrations, ensuring stable growth for the crypto sector. High-profile meetings, such as those between CEOs and Senate Banking Chairman Tim Scott, highlight foundational challenges like defining crypto assets—a crucial first step toward a coherent statutory framework.

Despite this bipartisan enthusiasm, significant political gridlock and procedural hurdles in the Senate continue to slow progress, with the chamber often charting its own path separate from the House’s efforts. This dynamic has frustrated stakeholders, as reflected in the declining market confidence—from 46% to 35.5%—in the CLARITY Act’s passage by the end of 2026, even as SEC Chair Paul Atkins publicly urges Senate action to cement U.S. leadership in crypto and AI innovation. The timing of a Senate floor vote before the August recess, and potential announcements from Senate Majority Leader Chuck Schumer or President Trump, remain pivotal to the bill’s fate and market sentiment.

The administration’s push to position the U.S. as a global leader in crypto innovation is reflected not only in legislative efforts but also in policy shifts aiming to dismantle restrictive measures from prior administrations. President Trump’s public endorsements and DOJ memos emphasizing non-criminalization of innovation signal a broader strategy to foster an environment conducive to technological convergence—where crypto, blockchain, and AI collectively drive economic growth. Concurrently, legislative proposals like Senator Lummis’s Bitcoin Act and Representative Begich’s ARMA Act demonstrate sustained congressional engagement to codify regulatory frameworks amid evolving market realities.

Regulatory modernization efforts are gaining traction as the SEC, in alignment with Congress, seeks to adapt traditional securities laws to the unique characteristics of blockchain-based markets. SEC Chair Gary Gensler’s remarks at the AI Plus Expo and the public recognition of concepts like 'vaults' in the CLARITY Act draft reflect a forward-looking approach that revisits outdated definitions of exchanges, brokers, and clearing agencies. This coordinated legislative and regulatory strategy aims to transition crypto oversight from enforcement-driven actions—highlighted by the nuanced rulings in the Ripple case—to clear, rule-based frameworks that acknowledge decentralized programmable infrastructure as foundational to next-generation financial markets.

Under Chair Paul Atkins, the SEC has strategically pivoted from a predominantly enforcement-driven stance to a formal rulemaking approach that embraces crypto innovation. This shift is epitomized by the forthcoming 'Innovation Exemption,' which for the first time would allow tokenized versions of U.S. equities to trade on decentralized platforms with reduced regulatory burdens, bypassing traditional broker-dealer registration requirements. Unlike earlier approvals that kept tokenized securities within conventional market infrastructures, this exemption enables genuine on-chain DeFi trading, reflecting the SEC's intent to integrate regulated markets with crypto ecosystems more rapidly and structurally.

The Innovation Exemption builds on a longstanding American securities law tradition of fostering technological progress through safe harbors, akin to the JOBS Act of 2012, which facilitated capital formation via regulatory relief. While previous crypto-specific safe harbor proposals, such as SEC Commissioner Hester Peirce's 2020 Token Safe Harbor, were not adopted and enforcement dominated under Chair Gary Gensler, the current SEC leadership has embraced formal rulemaking to provide clearer, more durable regulatory frameworks. This approach aims to balance innovation with investor protection, as Peirce herself cautioned that the exemption is narrowly tailored and not a blanket approval for all tokenized stock trading.

Complementing the Innovation Exemption, the SEC under Atkins is preparing 'Regulation Crypto,' a comprehensive safe harbor framework designed to ease fundraising and operational compliance for crypto startups. This proposal includes provisions such as a $75 million fundraising cap and a multi-year exemption from full securities registration, contingent on disclosure and network decentralization reports. By offering transition periods and clearer disclosure expectations, Regulation Crypto signals a decisive move away from the enforcement-heavy policies of the prior administration, aiming to establish the U.S. as a global leader in crypto regulation and to reduce the offshore migration of token projects.

Beyond individual exemptions, the SEC is actively developing a broader regulatory framework guided by the principle of 'Innovation Without Arbitrage,' seeking to foster technological advancement while preventing regulatory loopholes. Key figures like Jamie Selway, SEC Trading and Markets Director, are instrumental in crafting rules that address token issuance, custody arrangements, and crypto trading platforms. These efforts, including the joint SEC-CFTC interpretation clarifying digital asset taxonomy, proceed independently of stalled congressional legislation such as the CLARITY Act, positioning the SEC’s rulemaking as the primary source of regulatory clarity for the crypto industry moving forward.

By early 2026, the SEC began signaling a major shift toward integrating crypto assets with traditional finance, exemplified by its regulatory adjustment allowing broker-dealers to apply a modest 2% haircut on qualifying stablecoins for net capital calculations, replacing the previously punitive 100% haircut. This nuanced policy change, explained by Commissioner Hester Peirce, eased capital requirements and fostered market convergence, setting the stage for deeper crypto-traditional finance integration.

In mid-2026, the SEC advanced this integration by preparing a comprehensive regulatory framework and an 'innovation exemption' to enable trading of tokenized stocks on blockchain platforms, including decentralized venues. Chair Paul Atkins championed this approach, which would allow tokenized versions of U.S. equities to trade with reduced regulatory burdens, sometimes without issuer consent, fundamentally reshaping the relationship between public companies and their shares. This exemption builds on prior approvals of Nasdaq’s and NYSE’s tokenized securities platforms but goes further by enabling genuine on-chain DeFi with peer-to-peer trading outside traditional market infrastructure.

Alongside regulatory advances, institutional infrastructure is rapidly evolving to support tokenized securities, with the Depository Trust and Clearing Corporation (DTCC) planning limited production of tokenized assets by July 2026 and a full launch by October. This development promises to enable 24/7, 365-day trading of tokenized stocks, eliminating traditional market hours and reducing volatility from market closures, a transformation SEC Chair Atkins advocates for as a move away from 'regulation by enforcement' toward clear rules accommodating blockchain’s combined exchange, clearing, and settlement functions.

Beyond equities, tokenization is driving innovation in ETFs and private markets, with many issuers experimenting with blockchain-based ETFs as a new distribution channel on DeFi platforms, potentially evolving into true competitors through smart contract-enabled pseudo ETFs. Meanwhile, partnerships like Polymarket’s collaboration with Nasdaq are integrating prediction markets on private companies, reflecting growing retail demand for liquid, synthetic exposure to private equity milestones rather than traditional ownership rights, signaling a broader fusion of digital asset technology with mainstream capital markets.

By mid-2026, the SEC's regulatory approach toward DeFi has evolved from broad uncertainty to a more structured framework, marked notably by the White House's review of the SEC's proposed 2026 Regulation Crypto rule. This milestone signals formal progress toward defining DeFi safe harbors, which could fundamentally reshape custody, disclosure, and product design across crypto markets. While the rulemaking process remains slow and technical—with comment periods and uncertain timelines—the eventual finalized rules on disclosure, custody, and prospectus delivery are poised to influence how DeFi products are structured and regulated, rewarding firms that adapt swiftly to these detailed requirements.

SEC Commissioner Hester Peirce has been pivotal in clarifying regulatory nuances within DeFi vaults, emphasizing that these vaults are not monolithic but exist on a spectrum—from fully autonomous smart contracts to those managed by human curators who actively adjust strategies and manage risk. This distinction is critical because vaults with discretionary human management increasingly resemble traditional fund managers, thereby triggering securities law requirements such as registration. Peirce's openness to engaging with DeFi builders reflects a shift toward a tailored regulatory framework that acknowledges the diverse operational models within on-chain financial products.

On July 22, 2026, Peirce underscored that existing securities laws, particularly the Howey Test, apply to on-chain vaults and lending strategies, potentially bringing approximately $25.9 billion in discretionary DeFi products under SEC oversight. Importantly, the SEC targets the discretionary actors—risk curators and human managers—rather than the underlying immutable smart contract code. This regulatory stance compels discretionary vault curators to either fully register under securities laws or seek new legislative exemptions, a dynamic that favors capital-rich curators capable of building compliance infrastructure while marginalizing smaller operators. This approach signals a significant shift toward regulating the economic substance and human discretion behind DeFi products rather than their technical architecture.

Looking ahead, the DeFi vault market is expected to grow predominantly in safer, foundational segments, such as on-chain repo markets for U.S. Treasuries, which enhance transparency, accessibility, and composability within global finance. Regulatory scrutiny appears concentrated on the higher-risk, discretionary corners of the vault ecosystem rather than the broader industry focused on scalable, transparent infrastructure. As Peirce notes, the regulatory focus is less about the bulk of vaults and more about the 'degen risk-taking margins,' suggesting that the future of DeFi regulation will balance fostering innovation in transparent markets with protecting investors from riskier discretionary activities.

By mid-2026, the SEC’s regulatory agenda has clearly pivoted from an enforcement-first posture to a structured framework aimed at fostering innovation and capital formation within the crypto sector. The agency’s 2026–30 strategic plan, under Chair Paul Atkins, outlines a commitment to a 'rational, coherent, and principled' approach, emphasizing clear enforcement against fraud and manipulation rather than expansive or novel legal theories. This shift is reflected in the SEC’s planned issuance of 38 regulatory actions, including the highly anticipated Regulation Crypto proposal, which draws heavily on Commissioner Hester Peirce’s 2020 Token Safe Harbor framework and promises durable legal clarity for blockchain-based transactions and crypto market structures.

Despite the SEC’s proactive regulatory momentum, legislative efforts to codify crypto oversight, particularly the CLARITY Act, remain stalled and uncertain. Although the Act has passed the House and Senate Banking Committee, it faces a critical Senate floor vote with only a 35.5% market-implied probability of passage by the end of 2026. SEC Chair Atkins has publicly urged Congress to advance this legislation to secure U.S. leadership in cryptocurrency and AI innovation, but with the bill’s fate hinging on Senate leadership’s scheduling and support, the SEC is preparing to independently issue comprehensive rules covering crypto asset issuance, custody, and trading venues if congressional action falters.

In the absence of legislative clarity, the SEC’s rulemaking and interpretive guidance are poised to become the primary source of regulatory certainty for the crypto industry through 2030. The agency’s March 2026 joint interpretation with the CFTC introduced a formal taxonomy for digital assets, clarifying that many tokens are not securities and addressing complex issues like staking and wrapped assets. This foundational work, coupled with ongoing initiatives such as Project Crypto and amendments to broker-dealer and trading rules, signals a durable regulatory architecture emerging from the SEC rather than Congress, effectively shaping the U.S. crypto landscape amid legislative gridlock.