The United States boasts some of the most robust and desirable financial markets worldwide, known for their liquidity, transparency, fairness, and depth. However, their foundational systems are starting to show their age. Clearinghouses, transfer agents, and various intermediaries add complexities and expenses at each stage, despite technological advancements offering possibilities for faster, more affordable, and more accessible markets.
Already, Wall Street is actively adopting blockchain technology. Consider tokenized Treasury bills, digital versions of government debt traded on public blockchains. These have rapidly grown into a $1 billion market. Also, major investment firms are experimenting with funds based on blockchain, and prominent international banks are exploring tokenized collateral and short-term repurchase agreements.
These moves aren’t speculative gambles. Instead, they enhance efficiency by accelerating settlement times, mitigating counterparty risk, and expanding investor participation.
The Securities and Exchange Commission (SEC) is paying attention. SEC Chair Paul Atkins recently announced a comprehensive initiative to modernize securities markets using blockchain, including decentralized finance (DeFi) tools like automated market makers. The question is no longer *if* securities will move to blockchain, but *how* U.S. regulators will guide that transition.
The main issue is that current regulations were designed for a different era. Existing securities laws mandate the use of a transfer agent for stock issuance, require custody by a “qualified custodian,” and stipulate that trading must occur through a broker on a registered exchange or alternative trading system.
These rules assume human involvement or centralized control at every point. Blockchain-based systems, however, reverse this logic. Smart contracts can issue shares, digital wallets can hold them, and peer-to-peer protocols can execute trades. While fairness, transparency, and investor protection remain critical policy goals, the processes and tools are now fundamentally different.
Consider custody. In traditional finance, qualified custodians like State Street or BNY Mellon protect assets in omnibus accounts. Investor safeguards focus on preventing theft or misuse of client assets. In blockchain environments, custody is determined by cryptographic keys: whoever controls the private key controls the asset.
While this might sound risky, implementing this through programmable smart contracts, such as vaults, can provide superior protection. This includes multi-signature authorizations, time locks, audit trails, and built-in compliance checks. Regulators should recognize these advancements as functional equivalents of qualified custodians, rather than trying to fit digital assets into outdated structures.
Regarding trading, the core of today’s securities market is Regulation National Market System (Reg NMS). This 2005 framework governs U.S. equity markets and connects fragmented trading platforms through order protection, best execution practices, and consolidated market data. It assumes the presence of brokers, exchanges, and clearinghouses.
Decentralized finance eliminates these intermediaries. Instead, liquidity pools and automated market makers execute trades directly and instantly on-chain. Validators and block builders determine which transactions are included and in what order, essentially becoming the “matching engines” of this new market structure. If these entities are performing the same functions, regulators should hold them to similar standards of fairness and non-discrimination, without applying rules that are only relevant to centralized intermediaries.
Critics express concerns about market manipulation within decentralized systems, and their concerns are valid. A phenomenon known as “maximal extractable value” (MEV) allows insiders to front-run or reorder transactions, profiting at the expense of ordinary investors.
Instead of ignoring this, policymakers could address MEV similarly to how they handled payment-for-order-flow in equities: as a structural conflict requiring transparency and controls. Industry-led solutions, such as batch auctions, encrypted order flow, and neutral sequencing infrastructure, can minimize MEV exploitation while maintaining efficiency. Regulators should encourage the development and adoption of these solutions instead of simply banning the technology.
The potential benefits are immense. Tokenized offerings could allow smaller businesses to raise capital globally at reduced costs. On-chain custody could decrease dependence on centralized intermediaries, granting investors more direct involvement and control. Decentralized trading could operate continuously with immediate settlement, boosting liquidity and resilience. Furthermore, programmable compliance, embedding disclosures, transfer restrictions, and auditability directly into tokens or smart contracts, could reduce compliance expenses while enhancing investor protection and regulatory oversight.
So, what actions should U.S. regulators take?
First, regulate by function, not form. If a cryptocurrency wallet or aggregator directs orders, it should adhere to best execution standards. If a sequencer dictates transaction ordering, it should abide by fair-access principles. If an oracle distributes price information, it should meet transparency and integrity requirements. The appearance might vary, but the economic functions are similar. Market-driven solutions are already developing fairness directly into blockchain architecture, sometimes surpassing what’s achievable with conventional systems.
Second, acknowledge inherent blockchain safeguards. Smart-contract vaults, MPC custody, and compliance-encoded tokens offer technological solutions to achieve regulatory adherence. Regulators should certify or establish standards for these technologies rather than dismissing them.
Third, support public infrastructure. The integrity of on-chain markets will heavily rely on open-source relayers, unbiased block builders, and reliable oracle networks. These are public assets that require both oversight and support. This includes public funding and safe-harbor frameworks that encourage experimentation without the threat of retroactive penalties.
Finally, tailor rules to the level of risk. A meme coin doesn’t present the same systemic risk as a tokenized stock or Treasury bond. Regulators should prioritize stricter standards for protocols handling securities and certain real-world assets, while allowing general-purpose DeFi to innovate under basic principles.
Securities markets have consistently evolved—from paper certificates to digital ledgers, from trading floors to electronic networks. Ideally, the SEC should adapt and enable the modernization of our markets. Blockchain is simply the next step in this evolution.
The key is to uphold the aspects that make our capital markets world-class—fairness, transparency, and investor protection—while building a regulatory framework that aligns with and leverages the unique capabilities of blockchain. Only then can the next generation of capital markets maintain America’s competitive advantage while fulfilling blockchain’s potential for a more open, efficient, and inclusive financial system.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.
Author Information
Tuongvy Le serves as general counsel at Veda Tech Labs, bringing experience from previous senior legal and policy positions across the digital asset landscape, including roles at Anchorage and Bain Capital Crypto.
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