The U.S. capital markets, renowned for their depth, liquidity, transparency, and fairness, are facing a critical inflection point. While these markets have long been the envy of the world, their legacy infrastructure is beginning to show signs of wear. Various intermediaries, including clearinghouses and transfer agents, add friction and costs at each stage of transaction processes, particularly as emerging technologies promise to make markets faster, cheaper, and more accessible.
Blockchain technology is already making inroads on Wall Street, with the emergence of tokenized Treasury bills—digital representations of government debt issued on public blockchains—growing to a remarkable $1 billion market almost overnight. Major asset managers are actively piloting blockchain-based funds, and global banks are experimenting with tokenized collateral and intraday repurchase agreements. These initiatives are viewed not as speculative risks but as efficiency enhancements designed to lower settlement times, mitigate counterparty risks, and expand investor access.
The Securities and Exchange Commission (SEC) is taking note of these advancements. SEC Chair Paul Atkins has revealed an agency-wide initiative to modernize securities markets via blockchain technology, including decentralized finance tools like automated market-makers. The critical question now revolves around how U.S. regulators will manage this transition toward on-chain securities.
A significant challenge lies in the fact that current regulations were formulated for a very different landscape. Under existing securities laws, the issuance of stocks requires a transfer agent, custody must be maintained by a “qualified custodian,” and trading is restricted to brokers on registered exchanges or alternative trading systems. These stipulations are tailored for a system underpinned by human intermediaries; however, on-chain systems challenge this traditional view. In these decentralized environments, smart contracts can issue shares, crypto wallets can hold assets, and peer-to-peer protocols can execute trades without centralized mediation.
Take custody, for instance. Traditionally, institutions like State Street or BNY Mellon act as qualified custodians, ensuring investor protections against theft or misuse of funds through omnibus accounts. In contrast, on-chain custody relies on cryptographic keys, tying asset control to whoever possesses the private key. While this arrangement might appear risky, using programmable smart contracts, such as vaults, can provide enhanced protections through multi-signature approvals, time locks, audit trails, and automated compliance checks. This evolution raises the possibility that regulators could view these technological solutions as functional equivalents to qualified custodians rather than attempting to retroactively align digital assets with outdated structures.
Regarding trading, the Regulation National Market System, instituted in 2005 to govern U.S. equity markets, is heavily reliant on brokers, exchanges, and clearinghouses to knit together fragmented venues through order protection and best execution mandates. However, such roles are non-existent in decentralized finance, where liquidity pools and automated market makers facilitate direct and instantaneous trades. In this new framework, validators and block builders effectively become the matching engines, and they must be subject to standards of fairness and non-discrimination comparable to those required of traditional intermediaries.
Concerns have also been raised about potential market manipulation in decentralized environments. One notable issue is “maximal extractable value,” which enables insiders to manipulate transaction ordering to benefit financially at the expense of everyday investors. Instead of overlooking these concerns, policymakers could approach this challenge similarly to how they address payment-for-order-flow in equities—recognizing it as a structural conflict that necessitates transparency and regulatory safeguards. Industry-driven solutions such as batch auctions and neutral sequencing infrastructure could mitigate abuses, ensuring efficiency without discarding the technology.
The potential benefits of adopting blockchain technology in capital markets are substantial. Tokenized issuance could empower smaller companies to raise capital at a reduced cost globally; on-chain custody could diminish dependence on centralized intermediaries while granting investors more direct control; decentralized trading could facilitate continuous operations with instantaneous settlement, enhancing liquidity and market resilience. Moreover, programmable compliance mechanisms could embed disclosures and regulatory frameworks directly into tokens, lowering compliance costs while bolstering investor protections.
In light of these developments, U.S. regulators have several important considerations:
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Regulate by Function, Not Form: Crypto wallets and aggregators facilitating order routing should adhere to best execution standards, while sequencers determining transaction ordering need to comply with fair-access standards. Although the forms of these modern systems differ from traditional ones, their economic roles are fundamentally similar.
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Recognize Crypto-Native Safeguards: Innovative technologies such as smart-contract vaults and compliance-encoded tokens offer ways to meet regulatory requirements by leveraging the inherent features of blockchain.
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Support Public Infrastructure: The foundational integrity of on-chain markets will rely on open-source relayers, neutral block builders, and dependable oracle networks. Policymakers should oversee these aspects while also promoting public funding and protections that encourage experimentation.
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Tailor Rules for Risk: Different categories of assets, such as meme currencies versus tokenized securities, pose varying levels of systemic risk. Regulators should focus on higher standards for protocols managing securities and significant real-world assets, allowing broader DeFi innovations to thrive under fundamental principles.
Historically, securities markets have undergone numerous transformations—from physical certificates to electronic records, and from trading floors to digital networks. The SEC has a longstanding tradition of adapting and facilitating these market evolutions. The emergence of blockchain represents a new chapter in this ongoing narrative, and the pivotal task ahead is to uphold the core values that have positioned U.S. capital markets as a global benchmark—fairness, transparency, and investor protection—while fostering a regulatory framework that optimally leverages blockchain technology. By doing so, the next generation of capital markets can bolster America’s competitive edge and fulfill the promise of a more open, efficient, and inclusive financial system.
