In a notable shift toward a more innovation-friendly approach, former SEC Commissioner and current Chair of the DeFi Innovation Council, Paul Atkins, has proposed conditional regulatory relief aimed at jump-starting decentralized finance (DeFi) in the United States. The proposal, which has already stirred conversation among regulators and innovators alike, suggests that carefully structured exemptions could provide breathing room for DeFi protocols — without sacrificing investor protection.
A Regulatory Thaw in the Making?
Atkins’ proposal encourages the SEC to adopt a “sandbox-style” framework that would allow DeFi projects to operate under provisional rules. These rules would be contingent upon meeting baseline transparency, security, and compliance obligations. In return, DeFi developers would gain a more predictable and less punitive regulatory environment — a welcome development in an ecosystem often stymied by legal uncertainty.
“The goal is to let innovation breathe while ensuring the core principles of investor protection and market integrity are upheld,” Atkins said at a recent financial policy summit. He emphasized that blanket enforcement or ill-fitting traditional securities laws are counterproductive in a space defined by open protocols and decentralized governance.
Clarifying the Gray Zones: Mining and Staking
As part of the broader effort to modernize regulatory approaches to DeFi, the SEC is also reviewing guidance related to mining and staking — two activities that have long sat in a gray area of securities law.
The new guidance aims to distinguish between:
- Passive staking models that may be considered investment contracts, and
- Validator-based systems where participants actively contribute to network security and are compensated accordingly.
This nuanced interpretation could reduce legal risk for projects and participants, providing a clearer framework for how these activities are treated under the Howey Test and related securities doctrines.
The Courts Weigh In: Legal Rulings Shape the Future
Recent legal cases involving DeFi platforms and token issuers are also beginning to shape the regulatory landscape. While the SEC continues to pursue enforcement actions in certain high-profile cases, courts have started to provide key interpretations that may limit — or at least clarify — the scope of the agency’s authority over decentralized protocols.
One case currently in the spotlight involves a DeFi protocol that used automated smart contracts for lending and borrowing without an identifiable issuer. The court’s upcoming ruling could influence how regulators treat DeFi entities that lack traditional corporate structures.
A Balancing Act: Innovation vs. Investor Safety
Atkins’ proposal is not without its critics. Some consumer advocacy groups worry that loosening rules could open the door to new scams and unvetted financial experiments. However, proponents argue that regulatory paralysis is already driving innovation offshore, threatening U.S. competitiveness in blockchain and Web3 technologies.
By introducing conditional relief and clearer guidelines, the SEC has an opportunity to strike a middle ground — protecting investors while nurturing a technology that could fundamentally reshape global finance.