Editor's Note: When regulators actively promote "on-chain traditional securities," the issue is no longer whether the technology is feasible, but whether the system is ready to keep up.
This article revolves around a key proposal: With the U.S. Securities and Exchange Commission (SEC) advancing on-chain financial markets, a16z and the DeFi Education Fund propose a "Software Safe Harbor" framework, attempting to delineate regulatory boundaries for a new class of market participants—non-custodial, decentralized blockchain applications.
The core logic is not complex: If these applications are merely neutral software interfaces, do not control assets, do not execute transactions, and do not provide advice, should they still be included in the regulatory framework of traditional brokerages?
Former SEC Chief Economist Craig Lewis' analysis provides a more structural answer to this question. He did not start from the question of "whether it should be regulated," but rather returned to a more fundamental comparison: Given the high costs and opacity inherent in the existing brokerage system, does the introduction of on-chain trading and automated settlement weaken the market or reconstruct its operation?
On one hand, atomic settlement, on-chain transparency, and 24/7 trading are redefining the efficiency boundary of financial infrastructure; on the other hand, investor protection mechanisms, market fragmentation, and new risks are also emerging in sync. The real divergence lies not in whether these risks exist, but in whether they have already existed in a different form in the traditional system, only to be long ignored.
From this perspective, the "Safe Harbor Proposal" looks more like an institutional experiment: it attempts to open a limited but verifiable space for on-chain finance without completely overturning the existing regulatory framework. The key question then shifts from "whether to go on-chain" to "which processes can go on-chain first."
If the past decade of the crypto industry has been technologically approaching traditional finance, the true variables next may come from how regulation redefines the boundary of the "intermediary" role.
Below is the original text:
Bringing traditional securities onto the chain is a core focus of the current U.S. Securities and Exchange Commission (SEC). The Commission recognizes the potential of tokenization and, under Chair Atkins's leadership, launched "Project Crypto" nine months ago to update U.S. securities-related rules and regulatory systems. Its goal is to gradually transition the national financial market to the chain, thereby achieving advantages such as instant settlement, 24/7 trading, and cost reduction.
However, to truly unlock the full potential of tokenized securities, innovators and investors still need clear "rules of the game," especially for those blockchain applications that allow users to trade tokenized securities in a peer-to-peer manner without intermediaries.
Based on this, we, along with the DeFi Education Fund, submitted a "Software Safe Harbor" proposal to the SEC in August of last year, outlining under what conditions such blockchain-based applications—specifically as neutral software programs that allow users to interact with public chain networks and smart contract protocols—can be exempt from the registration requirements of the Securities Exchange Act of 1934. The proposal not only explains how these applications create value for market participants but also illustrates how they align with the SEC's core mission of protecting investors, maintaining fair and orderly markets, and fostering capital formation.
Today, Craig Lewis, a professor at Vanderbilt University and former SEC Chief Economist and Director of the Division of Economic and Risk Analysis, has officially submitted his economic analysis report on this "Software Safe Harbor" proposal to the SEC. While Lewis's research focuses on the proposal itself, it broadly evaluates the economic costs and benefits of tokenized securities, providing key insights into how blockchain technology is reshaping the traditional financial system. Despite receiving funding from a16z for this study, Professor Lewis employed an independent and rigorous methodology in his evaluation.
In his analysis, Lewis presents five main benefits that the safe harbor mechanism could unlock for compliant applications:
· Atomic Settlement: Eliminating counterparty credit risk from delayed settlement and reducing systemic risk that could arise from central counterparty failures.
· On-Chain Transparency: Replacing opaque private ledger systems with publicly verifiable transaction records.
· 24/7 Continuous Trading: Breaking through the time and geographical constraints of traditional exchanges to enhance price discovery efficiency and liquidity.
· Substantial Cost Reduction: Enabling automatic execution of processes like dividend distribution and compliance through smart contracts. For example, Ripple and BCG's research shows that tokenizing investment-grade bonds can reduce operational costs by 40% to 60%.
· Lowering Entry Barriers: Attracting new developers to the market, putting competitive pressure on traditional financial institutions to innovate, ultimately benefiting users.
At the same time, Lewis also points out four potential costs that the proposal may bring:
· Investor Protection May Be Weakened: For instance, traditional brokers can freeze assets or roll back transactions, capabilities not inherently present in compliant applications' design.
· Regulatory Arbitrage Risk: Some traditional institutions may try to transition to compliant applications to evade regulatory obligations, but the costs of this transition may be high.
· Market Fragmentation Risk: Tokenized securities trading may further fragment market liquidity and transmit risk to the traditional financial system through DeFi leverage mechanisms. However, Lewis believes this should be evaluated in comparison with the existing dark pools and OTC trading systems.
· Retail Trading Cost Issues: Such as Gas fee volatility, slippage, and smart contract vulnerabilities, but these should be compared to implicit costs in traditional finance. At the same time, DeFi fees are significantly decreasing, for example, Ethereum's Berlin upgrade has reduced L2 data costs by over 90%.
Lewis's analysis is specifically limited to front-end applications that meet safe harbor conditions and emphasizes that these applications are essentially "passive software interfaces" designed not to introduce risks that the Securities Exchange Act attempts to avoid. These conditions include:
· Non-custodial architecture
· Lack of autonomous trading execution authority
· No marketing or investment advice
· Only access to truly decentralized (or actively moving in that direction) protocols
He further points out that the benchmark for comparison should not be some idealized market structure but the current broker-dealer system — which includes significant implicit costs such as DTC fees, clearing and settlement fees, intermediary markups, and insurance buffers.
In conclusion, Lewis finds that if the SEC were to formally assess these costs and benefits, it would likely discover that this safe harbor mechanism helps unlock the significant economic value inherent in tokenized securities.
As Chairman Atkins has said, tokenization "may reshape the financial system as we know it." The SEC has expressed its support for this direction through "Project Crypto," joint guidance, and other means.
However, to truly realize this vision, a clear and effective regulatory framework is still needed for blockchain applications that support peer-to-peer trading. This is the goal of the current safe harbor proposal, and Professor Lewis's analysis also indicates that its overall economic logic is highly compelling — despite trade-offs, the benefits are likely to outweigh the costs.
Lewis has charted the course, and we look forward to the committee advancing along this path.
