SEC Eyes 1990s Playbook to Create Crypto ‘Innovation Pathway’ for On-Chain Trading

On May 8, SEC Chair Paul Atkins outlined a potential pathway for on-chain trading systems to operate within the regulatory framework, suggesting the agency could adopt a limited “innovation pathway” in the near term. This approach mirrors the SEC’s handling of electronic trading in the 1990s, when it issued targeted no-action letters before finalizing Regulation ATS in 1998.

The 1998 rule established a middle ground, allowing alternative trading systems to function as broker-dealers under specific conditions while the market matured. The SEC described Regulation ATS as a framework designed to “encourage market innovation” without compromising investor protections. Atkins’ proposal follows a similar two-step model: conditional access first, followed by formal rulemaking to define how exchange, broker-dealer, clearing, and transfer-agent roles apply to software-based markets.

This approach marks a potential shift from the SEC’s recent enforcement-heavy posture toward crypto firms. For companies that have operated for years without clear regulatory guidance, the proposed pathway could provide a structured route to compliance.

Why On-Chain Markets Require a New Regulatory Architecture

Traditional SEC rules are built around distinct, regulated functions—exchanges match orders, broker-dealers route and execute them, clearing agencies settle trades, and transfer agents record ownership. However, a single on-chain protocol can automate all these functions in seconds without intermediaries, creating legal ambiguity.

Atkins acknowledged this friction, noting that applying existing rules to software that consolidates these roles produces uncertainty for both firms and regulators. A limited pathway aims to resolve this by allowing firms to operate within the regulatory perimeter while the SEC works on broader definitional updates.

How On-Chain Protocols Overlap with Traditional SEC Categories

The proposed pathway could take several forms, including exemptive relief, conditional no-action letters, a pilot program, a tailored registration framework, or a registration-lite model for certain on-chain venues. The near-term goal is conditional access, followed by formal rulemaking to future-proof the framework.

The SEC has already experimented with temporary tools in this space. On April 13, the Division of Trading and Markets issued a no-action letter to Paxos Trust Company, allowing it to continue operating its stablecoin issuance under certain conditions. This action reflects the agency’s willingness to use interim measures while developing long-term policies.