The SEC’s New Stance: “Innovation Exemptions” to “On-Chain Finance” — Is Another DeFi Summer on the Horizon?
Decentralized Finance (DeFi) has exploded since 2018, becoming a core pillar of the global crypto ecosystem. With its open, permissionless financial protocols, DeFi offers a wide range of services like trading, lending, derivatives, stablecoins, and asset management. These services leverage smart contracts, on-chain settlement, decentralized oracles, and governance mechanisms to replicate and reimagine traditional finance. Especially since the “DeFi Summer” of 2020, DeFi’s Total Value Locked (TVL) soared to over $180 billion, signaling unprecedented scalability and market acceptance.
However, this rapid growth has also brought regulatory ambiguity, systemic risks, and a lack of clear oversight. Under former SEC Chair Gary Gensler, US regulators took a strict, enforcement-focused approach to the crypto industry. DeFi protocols, DEX platforms, and DAO governance structures were often scrutinized for potential violations related to unregistered securities, broker-dealer activities, or clearing agent issues. From 2022 to 2024, projects like Uniswap Labs, Coinbase, Kraken, and Balancer Labs faced various investigations and enforcement actions from the SEC or CFTC. The lack of clear criteria for “sufficient decentralization,” “public fundraising,” or “operating as a securities trading platform” left the DeFi industry in limbo, hindering technical progress, shrinking capital investment, and driving developers away.
But that regulatory landscape changed significantly in Q2 2025. In early June, new SEC Chair Paul Atkins, during a congressional fintech hearing, outlined a surprisingly positive regulatory path for DeFi. He announced three key policy directions:
- Innovation Exemption: Highly decentralized protocols would get an “innovation exemption,” temporarily easing some registration requirements within specific pilot programs.
- Functional Categorization Framework: Regulations would be based on a protocol’s business logic and on-chain operations, rather than a blanket “security” classification just because it uses a token.
- Regulatory Sandbox for DAOs & RWAs: DAO governance structures and Real-World Asset (RWA) projects would be brought into an open financial regulatory sandbox, using low-risk, auditable regulatory tools for fast-evolving tech.
This policy shift aligns with the Financial Stability Oversight Council (FSOC)’s May 2025 “Digital Asset Systemic Risk White Paper,” which for the first time suggested using regulatory sandboxes and functional testing to protect investors without stifling innovation.
Evolution of US Regulatory Path: From “Presumed Illegal” to “Functionally Adaptive”
The evolution of US regulation for DeFi reflects how financial compliance frameworks adapt to new technologies, and how regulators balance “financial innovation” with “risk prevention.” The SEC’s current stance isn’t isolated; it’s the result of inter-agency dynamics and gradual regulatory shifts over the past five years. To understand this transition, we need to look back at the initial regulatory attitudes towards DeFi, the feedback loop from major enforcement actions, and the tension between federal and state legal applications.
Since the DeFi ecosystem began to form around 2019, the SEC’s core regulatory logic relied on the 1946 Howey Test for determining what constitutes a security. Under this test, any contract involving an investment of money, in a common enterprise, with an expectation of profits from the efforts of others, could be deemed a securities transaction and subject to regulation. By this standard, most tokens issued by DeFi protocols (especially those with governance rights or revenue share) were presumed to be unregistered securities, posing compliance risks. Additionally, the Securities Exchange Act and Investment Company Act meant that any activity involving matching, clearing, holding, or recommending digital assets, without explicit exemption, could be deemed illegal operation as an unregistered broker-dealer or clearing agency.
In 2021 and 2022, the SEC launched several high-profile enforcement actions. Notable cases include investigations into Uniswap Labs for potentially operating an “unregistered securities platform,” accusations against Balancer and dYdX for “illegal market promotion,” and even the Treasury Department’s OFAC sanctioning privacy protocol Tornado Cash. This showed a broad, aggressive, and often ambiguous enforcement strategy in the DeFi space. The regulatory tone during this period could be summarized as “presumption of illegality” — project teams had to prove their protocol design wasn’t a security or outside US jurisdiction, or face compliance risks.
However, this “enforcement first, rules later” approach quickly faced challenges in legislative and judicial arenas. First, the outcomes of numerous lawsuits gradually exposed the limitations of regulatory judgment in decentralized contexts. For example, a US court’s ruling in the SEC vs. Ripple case, stating that XRP wasn’t a security in some secondary market transactions, effectively weakened the SEC’s “all tokens are securities” stance. Meanwhile, the ongoing legal battles between Coinbase and the SEC made “regulatory clarity” a central theme for industry and congressional efforts to pass crypto legislation. Second, the SEC faced fundamental difficulties applying laws to structures like DAOs. Without traditional legal entity status or a centralized beneficiary, a DAO’s on-chain autonomous mechanisms were hard to categorize under the “profits from the efforts of others” securities logic. Consequently, regulators lacked sufficient legal tools for effective subpoenas, fines, or injunctions against DAOs, leading to enforcement impasses.
Against this backdrop of evolving institutional consensus, the SEC’s strategy shifted after personnel changes in early 2025. New Chair Paul Atkins has long advocated for “technological neutrality” as a regulatory baseline, emphasizing that financial compliance should be designed based on function, not just technical implementation. Under his leadership, the SEC established a “DeFi Strategy Research Group” and teamed up with the Treasury Department to form a “Digital Finance Interaction Forum.” They’re using data modeling, protocol testing, and on-chain tracking to build a risk classification and governance assessment system for major DeFi protocols. This tech-driven, risk-tiered regulatory approach represents a transition from traditional securities law logic to “functionally adaptive regulation” — where the actual financial functions and behavioral patterns of DeFi protocols inform policy design, integrating compliance requirements with technical flexibility.
It’s important to note that the SEC hasn’t abandoned its claim of regulatory authority over DeFi. Instead, it’s experimenting with more flexible, iterative regulatory strategies. For example, DeFi projects with clear centralized components (like front-end interface operations, multi-sig governance control, or protocol upgrade permissions) will likely be prioritized for registration and disclosure requirements. For highly decentralized, purely on-chain protocols, an “innovation exemption” might be introduced, perhaps involving “technical testing + governance audits.” Furthermore, by guiding projects into regulatory sandboxes, the SEC plans to foster a compliant “middle ground” for the DeFi ecosystem while ensuring market stability and investor protection, aiming to avoid the exodus of innovation caused by a one-size-fits-all policy.
Overall, US DeFi regulation is evolving from early legal enforcement and suppression towards institutional negotiation, functional identification, and risk guidance. This shift not only reflects a deeper understanding of technological nuances but also represents regulators’ attempts to introduce new governance paradigms when facing open financial systems. In future policy implementation, achieving a dynamic balance between protecting investor interests, ensuring systemic stability, and promoting technological development will be the core challenge for the sustainability of DeFi regulatory frameworks in the US and globally.
Three Keys to Wealth: Value Revaluation Under Institutional Logic
With the official rollout of the SEC’s new regulatory policy, the US regulatory environment’s overall stance towards decentralized finance has fundamentally changed. This shift from “post-event enforcement” to “pre-emptive compliance” and now to “functional adaptation” has provided much-needed institutional tailwinds for the DeFi sector. As the new regulatory framework becomes clearer, market participants are re-evaluating the underlying value of DeFi protocols. Several sectors and projects whose valuations were previously suppressed by “compliance uncertainty” are now showing significant revaluation potential and allocation value. From an institutional logic perspective, the current main drivers of value revaluation in DeFi are focused on three core areas: the institutional premium for compliant intermediary structures, the strategic importance of on-chain liquidity infrastructure, and the credit rebuilding potential of high intrinsic yield protocols. These three areas form the starting point for the next round of DeFi’s “wealth codes.”
First, as the SEC emphasizes “function-oriented” regulatory logic and proposes including some front-end operations and service layer protocols in registration exemptions or regulatory sandbox testing, on-chain compliant intermediaries are becoming new value opportunities. Unlike the early DeFi ecosystem’s extreme pursuit of “disintermediation,” current regulatory and market demands for “compliant intermediary services” have created a structural need. Especially in critical areas like identity verification (KYC), on-chain anti-money laundering (AML), risk disclosure, and protocol governance custody, project teams with clear legal governance structures and service licenses will become essential for compliant pathways. This trend will give DID protocols offering on-chain KYC services, compliant custodians, and front-end operating platforms with high governance transparency greater policy tolerance and investor favor, thus transforming their valuation from “technical tool attributes” to “institutional infrastructure.” It’s particularly noteworthy that “compliant chain” modules rapidly developing in some Layer 2 solutions (e.g., Rollups with whitelisting mechanisms) will also play a key role in the rise of this compliant intermediary structure, providing a trustworthy execution foundation for traditional financial capital to participate in DeFi.
Second, on-chain liquidity infrastructure, as the underlying resource allocation engine of the DeFi ecosystem, is regaining strategic valuation support due to regulatory clarity. Decentralized exchange protocols like Uniswap, Curve, and Balancer, while facing multiple challenges over the past year (liquidity drying up, ineffective token incentives, regulatory uncertainty), are now seeing a resurgence under the new policy. Platforms with protocol neutrality, high composability, and governance transparency will again become the preferred choice for structural capital inflows into the DeFi ecosystem. Especially with the SEC’s principle of “separating protocol and front-end regulation,” the legal risk for underlying AMM protocols, as on-chain code execution tools, will significantly decrease. Coupled with the continuous enrichment of RWA (Real-World Assets) and on-chain asset bridges, on-chain trading depth and capital efficiency are expected to see a systemic recovery. Additionally, on-chain oracles and price feed infrastructure represented by Chainlink, due to their classification as not being direct financial intermediaries by regulators, are becoming key “risk-controlled neutral nodes” in institutional-grade DeFi deployments, bearing significant responsibility for systemic liquidity and price discovery within the compliance framework.
Third, DeFi protocols with high intrinsic yields and stable cash flows will enter a credit repair cycle after regulatory pressure is released, again becoming a focus for risk capital. In previous DeFi cycles, lending protocols like Compound, Aave, and MakerDAO became the credit foundation of the entire ecosystem with their robust collateral models and liquidation mechanisms. However, with the spread of the crypto credit crisis in 2022–2023, DeFi protocol balance sheets faced liquidation pressure, and events like stablecoin de-pegs and liquidity crunches became frequent. Coupled with asset security concerns caused by regulatory grey areas, these protocols generally faced structural risks of weakened market trust and low token prices. Now, with regulations gradually clarifying and a systematic path for recognizing protocol revenue, governance models, and audit mechanisms being built, these protocols, with their quantifiable, on-chain verifiable real revenue models and lower operational leverage, actually have the potential to become “on-chain stable cash flow vehicles.” Especially as DeFi stablecoin models evolve towards “multi-collateral + real-asset pegging,” on-chain stablecoins like DAI, GHO, and sUSD will build a regulatory moat against centralized stablecoins (like USDC, USDT) under clearer regulatory positioning, enhancing their systemic attractiveness for institutional capital allocation.
It’s worth noting that the common logic behind these three main themes is the rebalancing process where the “policy recognition dividend” brought by the SEC’s new policy is being converted into “market capital pricing weight.” Past DeFi valuation systems relied heavily on speculative momentum and amplified expectations, lacking stable institutional moats and fundamental support, leading to significant fragility during market downturns. Now, with regulatory risks mitigated and legal pathways confirmed, DeFi protocols can establish valuation anchors for institutional capital through real on-chain revenue, compliant service capabilities, and systemic participation thresholds. The establishment of this mechanism not only enables DeFi protocols to rebuild their “risk premium-return model” but also means that DeFi will, for the first time, have a credit pricing logic similar to traditional financial enterprises, creating the institutional prerequisites for its integration into the traditional financial system, RWA integration channels, and on-chain bond issuance.
Market Reaction: From TVL Soaring to Asset Price Revaluation
The SEC’s new regulatory policy didn’t just send a positive signal of cautious acceptance and functional regulation for DeFi; it quickly triggered a chain reaction in the market, forming an efficient positive feedback loop of “institutional expectation — capital inflow — asset revaluation.” The most direct manifestation is the significant rebound in DeFi’s Total Value Locked (TVL). Within a week of the new policy’s announcement, according to major data platforms like DefiLlama, Ethereum’s DeFi TVL rapidly jumped from approximately $46 billion to nearly $54 billion, a weekly increase of over 17% — the largest weekly gain since the FTX crisis in 2022. Simultaneously, TVL for major protocols like Uniswap, Aave, Lido, and Synthetix also increased, and on-chain transaction activity, Gas usage, and DEX trading volumes all rebounded. This broad market response indicates that clear regulatory signals have, in the short term, effectively eased institutional and retail investors’ concerns about potential legal risks in DeFi, thus driving off-chain capital back into the sector and creating a structural injection of new liquidity.
Driven by rapid capital inflow, several top DeFi assets have seen price revaluations. For example, governance tokens like UNI, AAVE, and MKR saw average price increases between 25% and 60% within a week of the new policy, significantly outperforming BTC and ETH during the same period. This price rebound isn’t merely sentiment-driven; it reflects the market’s new valuation models for DeFi protocols’ future cash flow capabilities and institutional legitimacy. Previously, due to compliance uncertainty, DeFi governance tokens’ valuations were often heavily discounted, with real protocol revenue, governance power value, and future growth potential not effectively reflected in market capitalization. Now, with clearer institutional pathways and policy tolerance for operational legality, the market is beginning to use traditional financial metrics like price-to-earnings (P/E), TVL multiples, and on-chain active user growth models to repair DeFi protocol valuations. This return to traditional valuation methodologies not only enhances DeFi assets’ investment appeal as “cash flow assets” but also signals the DeFi market’s evolution towards a more mature, quantifiable capital pricing stage.
Furthermore, on-chain data also shows a shift in capital distribution. After the new policy, several protocols saw significant increases in on-chain deposit transactions, user numbers, and average transaction values, especially in protocols with high RWA integration (like Maple Finance, Ondo Finance, Centrifuge), where the proportion of institutional wallets rapidly increased. For example, Ondo’s short-term US Treasury token, OUSG, saw its issuance grow by over 40% since the policy’s release, indicating that some institutional capital seeking compliant pathways is leveraging DeFi platforms to allocate on-chain fixed-income-like assets. At the same time, stablecoin inflows to centralized exchanges showed a declining trend, while net stablecoin inflows to DeFi protocols began to recover — this change suggests investor confidence in on-chain asset security is returning. The trend of the decentralized financial system regaining pricing power for capital is beginning to emerge, with TVL no longer just a short-term liquidity indicator for speculative behavior, but gradually becoming a barometer for asset allocation and capital trust.
It’s worth noting that while the market reaction is significant, asset price revaluation is still in its early stages, and the realization of the institutional premium is far from complete. Compared to traditional financial assets, DeFi protocols still face higher regulatory trial-and-error costs, governance efficiency issues, and challenges with on-chain data auditing, leading the market to maintain a degree of caution even after a shift in risk appetite. But it is precisely this synchronized situation of “contracting institutional risk + repairing value expectations” that opens up space for mid-term valuation expansion in the DeFi sector. Currently, the P/S (price-to-sales) ratios of many leading protocols are still far below their mid-2021 bull market levels, and with real income maintaining growth, regulatory certainty will drive their valuation centers upwards. Meanwhile, asset price revaluation will also transmit to token design and distribution mechanisms. For instance, some protocols are restarting governance token buybacks, increasing protocol surplus distribution ratios, or pushing for staking model reforms tied to protocol revenue, further integrating “value capture” into market pricing logic.
Future Outlook: DeFi’s Institutional Restructuring & New Cycle
Looking ahead, the SEC’s new policy isn’t just a regulatory adjustment; it’s a pivotal turning point for the DeFi industry towards institutional restructuring and sustained healthy development. This policy clarifies regulatory boundaries and market operating rules, laying the groundwork for DeFi to transition from “wild growth” to a “compliant and orderly” mature market. Against this backdrop, DeFi not only faces a significant reduction in compliance risks but also ushers in a new stage of value discovery, business innovation, and ecosystem expansion.
First, from an institutional logic perspective, DeFi’s institutional restructuring will profoundly impact its design paradigms and business models. Traditional DeFi protocols often prioritized “code is law” automated execution, paying less attention to compatibility with real-world legal systems, leading to potential legal grey areas and operational risks. The SEC’s new policy, by clarifying and detailing compliance requirements, compels DeFi projects to design dual identity systems that possess both technical advantages and compliance attributes. For example, balancing compliant identity verification (KYC/AML) with on-chain anonymity, assigning legal responsibility for protocol governance, and establishing compliant data reporting mechanisms will all become crucial considerations for future DeFi protocol design. By embedding compliance mechanisms into smart contracts and governance frameworks, DeFi will gradually form a new paradigm of “embedded compliance,” achieving deep integration of technology and law, thereby reducing uncertainty and potential penalties from regulatory conflicts.
Second, institutional restructuring will inevitably drive the diversification and deepening of DeFi business models. Historically, the DeFi ecosystem was overly reliant on liquidity mining and trading fees as short-term incentives, struggling to consistently generate stable cash flow and profitability. Under the new policy, project teams will focus more on building sustainable profit models, such as through protocol-level revenue sharing, asset management services, compliant bond and collateral issuance, and RWA (Real-World Asset) tokenization. This will gradually create revenue loops comparable to traditional financial assets. Especially in RWA integration, the compliance signal significantly boosts institutional trust in DeFi products, allowing diverse asset types like supply chain finance, real estate securitization, and bill financing to enter the on-chain ecosystem. In the future, DeFi won’t just be a decentralized exchange; it will become an institutionalized financial infrastructure for on-chain asset issuance and management.
Third, the institutional restructuring of governance mechanisms will also be a core driver for DeFi entering a new cycle. Past DeFi governance often relied on token voting, leading to issues like overly dispersed governance power, low voter turnout, and inefficient governance, coupled with a lack of connection to traditional legal systems. The SEC’s proposed governance norms encourage protocol designers to explore more legally effective governance frameworks, such as through DAO legal entity registration, legal confirmation of governance actions, and the introduction of multi-party compliance oversight mechanisms to enhance governance legitimacy and enforceability. Future DeFi governance may adopt a hybrid model, combining on-chain voting with off-chain agreements and legal frameworks, forming transparent, compliant, and efficient decision-making systems. This will not only help mitigate power centralization and manipulation risks during governance but also build trust with external regulators and investors, becoming a crucial cornerstone for DeFi’s sustainable development.
Fourth, with the improvement of compliance and governance systems, the DeFi ecosystem will welcome a richer array of participants and a transformation of capital structure. The new policy significantly lowers the barrier for institutional investors and traditional financial institutions to enter DeFi. Large asset management firms, pension funds, family offices, and other traditional capital are actively seeking compliant on-chain asset allocation solutions, which will spur the creation of more customized DeFi products and services for institutions. Simultaneously, regulated insurance, credit, and derivatives markets will see explosive growth, promoting comprehensive coverage of on-chain financial services. Furthermore, project teams will optimize tokenomics models, strengthening the intrinsic rationality of tokens as governance tools and value carriers, attracting long-term holding and value investment, reducing short-term speculative volatility, and injecting continuous momentum into the ecosystem’s stable development.
Fifth, technological innovation and cross-chain integration are the technical pillars and development engines of DeFi’s institutional restructuring. Compliance demands drive protocols to innovate in privacy protection, identity authentication, and contract security, leading to the widespread adoption of privacy-enhancing technologies like zero-knowledge proofs, homomorphic encryption, and multi-party computation. Meanwhile, cross-chain protocols and Layer 2 scaling solutions will enable seamless asset and information flow across multi-chain ecosystems, breaking down on-chain silos and enhancing overall DeFi liquidity and user experience. In the future, a multi-chain integrated ecosystem built on a compliant foundation will provide a solid base for DeFi business innovation, promoting the deep integration of DeFi with traditional financial systems and realizing a new form of “on-chain + off-chain” hybrid finance.
Finally, it’s worth noting that while the DeFi institutionalization process has opened a new chapter, challenges remain. The stability of policy implementation and international regulatory coordination, control of compliance costs, enhancing project teams’ compliance awareness and technical capabilities, and balancing user privacy protection with transparency are all critical issues for DeFi’s healthy future. All industry stakeholders must collaborate to promote standard-setting and self-regulatory mechanisms, leveraging industry alliances and third-party audit firms to form a multi-layered compliance ecosystem, continuously raising the overall institutional level and market trust of the industry.
Conclusion: DeFi’s New Frontier of Wealth, Just Beginning
DeFi, as the cutting edge of blockchain financial innovation, is at a pivotal juncture of institutional restructuring and technological upgrades. The SEC’s new policy has brought an environment of both regulation and opportunity, pushing the industry from wild growth to compliant development. In the future, as technology continues to advance and the ecosystem matures, DeFi is expected to achieve broader financial inclusion and value redefinition, becoming a vital cornerstone of the digital economy. However, the industry still needs to continuously strive in areas like compliance risk, technical security, and user education to truly unlock the long-term prosperity of this new wealth frontier. With the SEC’s new policy, the shift from “innovation exemption” to “on-chain finance” could lead to a full-blown explosion, potentially bringing another DeFi Summer and a significant revaluation of DeFi blue-chip tokens.
What are your thoughts on how the SEC’s new policy might specifically impact the development of Real-World Assets (RWAs) within the DeFi ecosystem?
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