Digital assets are maturing. The tokenization of financial assets, the permeance of Bitcoin and Ether exchange-traded products (“ETPs”), and the rise of stablecoins exemplify how digital assets are coming of age and intersecting with traditional financial products and services.
This convergence raises significant policy, regulatory, and legal issues related to central matters such as taxonomy, custody of digital assets, and the function of market intermediaries. Specifically, what role should policymakers and regulators play when emerging technologies conflict with established regulatory frameworks that may be ill-suited for new products and services? As the legal and regulatory framework for digital assets evolves, fundamental market forces are emerging, driven by increased regulatory clarity and the development of commercially viable products and services that create efficiencies at scale.
Intersectionality of Digital Assets and Traditional Finance
The Trump administration’s pro-crypto stance has created interesting dynamics, including increased competition in the sector. The current political and regulatory environment has created an aperture for proponents of digital assets to gain access to previously inaccessible segments of the financial market and obtain legal and regulatory clarity for the industry.
On March 28, 2025, the Federal Deposit Insurance Corporation (“FDIC”) rescinded FIL-16-2022 and issued new guidance that allows FDIC-supervised institutions to engage in permissible crypto-related activities without needing prior approval from the FDIC. Also, on May 28, 2025, the U.S. Department of Labor rescinded a 2022 guidance that cautioned plan fiduciaries to exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan’s investment menu for plan participants. While these developments present tremendous opportunities, they also come with trade-offs for those looking to disrupt the financial sector.
Additionally, with the Guiding and Establishing National Innovation for U.S. Stablecoins Act (“GENIUS Act”) signed into law on July 18, 2025, providing regulatory clarity to the asset class, incumbent companies and banks are positioning themselves to enter the market. Reports indicate that Meta Platform, Inc. (formerly Facebook, Inc.) is in discussions with cryptocurrency firms to introduce stablecoins on its platform, following its failed attempt to launch Diem for cross-border payments in 2019. Likewise, Walmart, Amazon, and large commercial banks are exploring the prospect of issuing their own stablecoins.
Increased Competition in the Digital Asset Industry
Counterintuitively, emerging disruptive digital asset projects had a competitive advantage by operating outside the mainstream financial system and in an environment of regulatory uncertainty. In essence, the regulatory risk associated with digital assets acted as a barrier to entry for established firms, while new entrants were better positioned to navigate and bear the risk. As digital assets integrate with traditional finance and regulatory risk decreases, competition is expected to increase as incumbents leverage network effects and institutional advantages to vie for market share. As a by-product, dealmaking is expected to increase as the industry consolidates with incumbents pursuing a buy, build, or partnership strategy, as exemplified by Robinhood’s recent acquisition of Bitstamp, one of the longest-running cryptocurrency exchanges.
The growing competition between established companies and new entrants will be significantly shaped by both legislative and regulatory developments. The U.S. Securities and Exchange Commission (“SEC”), as the primary regulator of the U.S. financial market, stands at the epicenter of these market dynamics as it works to establish a regulatory framework for digital assets that aligns with the current administration’s priorities and its mission of protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation. As part of its broader mandate to facilitate capital formation, the SEC aims to foster innovation in the economy. The SEC’s role will be crucial because the generally adaptable and flexible framework of securities law is beginning to show signs of discordance with the transformative potential of digital asset use cases, such as tokenization of assets, heightening the stakes in this rapidly changing landscape.
Tokenization of the securities market and financial assets is, in part, a continuation of the evolution of dematerialization. As technology advances, market participants are adopting disruptive technologies to increase efficiency and reduce friction in value transfer.
Traditionally, dematerialized records and information depicting ownership or value are maintained on centralized ledgers or databases with trusted central intermediaries. With the launch of Bitcoin, Satoshi Nakamoto introduced a cryptographic proof mechanism that employs blockchain technology to maintain information about crypto assets and facilitate peer-to-peer transactions in a decentralized manner, eliminating the need for a central intermediary. This innovation opened up the market to new entrants.
Next-generation Layer-2 protocols, which mainly operate off-chain and do not record every transaction on the base-layer or Layer-1 blockchain networks, along with validation solutions — the consensus mechanisms used to maintain a consistent and reliable ledger and verify transactions — are emerging to address scalability and interoperability challenges. Tokenizing real-world assets to streamline value transfer across centralized and decentralized networks, on both permissioned and permissionless databases, using tools like smart contracts as accelerants, is evolving from mere proof of concept to implementation.
As digital assets continue to gain mainstream acceptance and the regulatory framework evolves, market forces will increase competitive pressure, creating both aligned and conflicting interests among established companies and new entrants. The SEC has committed to maintaining a merit- and technology-neutral approach as it considers various policy interests and competing perspectives to develop a regulatory framework for crypto assets that does not undermine established approaches for regulating noncrypto assets and transactions.
The Developing Regulatory Landscape and Its Impact on Competition
The SEC Task Force and Taxonomy
Recently, SEC Chairman Paul S. Atkins announced Project Crypto — “a Commission-wide initiative to modernize the securities rules and regulations to enable America’s financial markets to move on-chain.” The announcement comes on the heels of the President’s Working Group on Digital Asset Markets releasing a report that, among other things, recommends that the SEC and other federal agencies use their existing authorities to provide clarity to market participants on issues such as registration, custody, trading, and recordkeeping. Chairman Atkins directed the SEC’s policy division to work with the crypto task force to develop proposals to implement the report’s recommendations.
The SEC launched its crypto task force on January 21, 2025, headed by Commissioner Hester M. Peirce, to help develop a regulatory framework for digital assets. Subsequently, on February 21, 2025, Commissioner Peirce released a statement, “There Must Be Some Way Out of Here” (“Statement”), which provides an insightful framework for analyzing key issues in the developing regulatory structure of digital assets. The Statement presents a potential taxonomy of four categories that serve as guideposts for a series of questions that the task force is considering to eliminate barriers for firms seeking to innovate with crypto assets and blockchain technology. The Statement requests public input on key topics, including security status, trading, custody requirements for various parties, ETPs, and tokenized securities.
Taxonomy, or the classification of digital assets for regulatory purposes, is a critical issue influencing competition between incumbents and new entrants in the financial market, as it forms the foundation for the regulatory treatment of these assets. To the extent that a new asset type serves similar functions or provides utility comparable to that of a traditional asset class, differences in regulatory costs or treatment can lead to unfair competitive advantages or disadvantages for market participants vying for market share. For instance, if an asset is deemed a security, the SEC will have primary regulatory jurisdiction, and the asset will be subject to the broad regulatory framework governing securities, including custody requirements and third-party intermediary obligations, such as those for exchanges, broker-dealers, and clearing agencies.
Technological advancements occasionally create dilemmas within a regulatory framework that require policymakers and regulators to reassess traditional classification lines and paradigms. As noted by industry experts, digital assets might have created such a dilemma in securities law. Broadly, the Securities Act and the Exchange Act enumerate several financial instruments that constitute a security, including the catchall term investment contract, which is intended to encompass various schemes that were not specifically listed.
During the secondary sale of digital assets that were the subject of the investment contract in an initial coin offering (“ICO”) — likely within the context of an exempt transaction — and that may not have any utility outside the ecosystem that created the investment contract, it is necessary to decouple the digital assets, which are merely computer code and alphanumeric cryptographic sequences, from the transactions or schemes in which the assets were sold, or to imply that the digital assets are more than just the subject of the investment contract. Separating the digital asset from the investment contract creates a potential regulatory gap and ambiguity in which the digital asset falls outside the regulatory framework of securities laws, as digital assets are not enumerated securities and do not clearly fall within the purview of the Commodity Futures Trading Commission (“CFTC”).
Most market participants in the crypto industry agree that establishing a clear and consistent taxonomy would enhance clarity in the industry’s regulatory framework. However, opinions vary on the most effective approach to categorize crypto assets and transactions. One of the Statement’s categories decouples crypto assets that are offered and sold as part of an investment contract, which is a security, from the crypto asset that may not itself be a security. Moreover, there is a specific category for tokenized securities.
Recent Guidance on Application of Federal Securities Laws to Digial Assets
In addition to taxonomy, the roles of market intermediaries and the custody of digital assets are crucial elements in the developing framework for digital assets, as they serve as key components in the competitive landscape and development of the digital asset ecosystem. As the SEC Staff (“Staff”) works on drafting definitive rules to regulate digital assets, it has issued several statements to clarify its position and provide guidance on the application of the federal securities laws to digital assets. Earlier this year, the Staff issued a statement clarifying that meme coins are presumptively not considered securities because they are typically purchased for entertainment, social interaction, or speculative purposes rather than as investments in a common enterprise with a reasonable expectation of profits, which are essential elements of an investment contract.
On May 29, 2025, the Staff issued a statement clarifying that certain staking activities on blockchain networks using proof-of-stake as a consensus mechanism do not constitute an investment contract and are not subject to securities law. The statement emphasized the difference between services that are merely administrative or ministerial and those that are entrepreneurial or managerial in nature. The former are indicative of nonsecurities transactions, while the latter have the propensity to be part of an investment contract.
Most recently, on August 5, 2025, the Staff issued a statement on certain liquid staking activities that have broad-reaching implications. Generally, liquid staking is a type of protocol that issues newly minted digital assets or staking receipt tokens that evidence ownership of digital assets deposited with a third-party staking service provider. Staking receipt tokens enable holders to maintain liquidity, pledge them as collateral, and participate in revenue-generating applications without withdrawing the deposited digital asset from staking.
It is the Staff’s view that liquid staking activities, as defined, do not involve the offer and sale of securities, nor does the offer and sale of staking receipt tokens, as described, unless the deposited digital assets are part of or subject to an investment contract. Regarding liquid staking activities, the Staff believes that service providers do not undertake entrepreneurial or managerial efforts, but rather perform administrative or ministerial tasks. The two statements provide a useful framework for structuring staking programs and related activities outside the scope of securities laws and have been largely lauded by the industry. However, it is important to note that these statements are nonbinding and highly fact dependent.
Legislative Developments
Along with developments involving regulatory bodies, there has been significant legislative movement toward establishing a framework for digital asset businesses to operate in the United States. On July 17, 2025, the House of Representatives passed the Digital Asset Market Clarity Act (“CLARITY Act”). Subsequently, the Senate Banking Committee released a draft of the Responsible Financial Innovation Act (“RFLA”) for responses. While the two acts overlap in some areas, they also differ considerably. Notably, the CLARITY Act is much more comprehensive than the RFLA, but both establish a regulatory framework for digital assets by dividing authority between the SEC and CFTC based on whether an asset is classified as a security or “digital commodity,” with the SEC having jurisdiction over securities and the CFTC over digital commodities. Generally, the CLARITY Act tends to classify more digital assets as digital commodities, while the RFLA gives the SEC more discretion to decide which assets should be considered “ancillary assets” — that are not securities — thus retaining more regulatory oversight. Whether and which version of this legislation ultimately gets enacted will greatly influence the trajectory of digital assets in the financial system, as legislation is lasting in nature and will shape the actions of regulators.
Nasdaq and SIFMA Recommendations
Market participants are highly vested in the evolving digital assets regulatory framework, as it will establish the foundation for competition in providing products and services, such as custody solutions, trading platforms, and broker-dealer services for financial products.
Notably, Nasdaq urged the SEC to promote fair competition among similarly situated financial instruments and market participants. It emphasized that “digital asset trading platforms and existing market participants should compete on a level playing field for all instruments.” In essence, Nasdaq is advocating to treat like assets alike and avoid differences in regulation that create the opportunity and incentive for regulatory arbitrage.
Similarly, the Securities Industry and Financial Markets Association (“SIFMA”) recommends that the SEC adopt the principle of “same risk, same activity, same regulatory outcome” to ensure that digital assets and market participants are subjected to regulatory outcomes that are risk-appropriate and consistent with those applied to traditional assets and market participants. SIFMA advocates that regulatory treatment should be based on the underlying risks associated with a given asset or transaction rather than the technology used. Additionally, SIFMA encourages the SEC to apply existing and well-established securities regulatory principles to digital assets whenever feasible, rather than developing a separate regulatory framework for this new class of assets and transactions. Moreover, this approach should be implemented through flexible, principle-based guidance rather than prescriptive mandates.
Fairness and Evaluation of Compatibility with Existing Regulatory Frameworks
Competitive pressure is creating a subtle dichotomy between relatively new entrants (such as Circle, Coinbase, and Consensys) and traditional players in the financial industry. Generally, the former group prefers a tailored regulatory framework to efficiently serve their niche target market, while the latter group favors a broader regulatory approach. Policymakers and regulators find themselves in the middle, tasked with discerning which aspects of this new asset class are genuinely innovative and incompatible with regulatory regimes, warranting a reassessment of existing regulatory frameworks as they strive to advance their mission and priorities. The questions posed by the SEC in the Statement highlight this complexity.
A helpful approach to analyzing the issues raised by the questions in the Statement is to examine their impact on the emerging asset class, the various intermediaries competing for market share, and the overall financial market. This is particularly relevant as the SEC works to fulfill its mission and ensure that the regulatory framework for digital assets does not become impractical or unduly hinder innovation. For example, many crypto projects do not involve traditional actors, such as an issuer to whom ongoing reporting obligations can be ascribed, a cornerstone upon which current securities law relies.
As digital assets intersect with traditional finance and compete for market share in similar products and services, it is essential to establish a regulatory framework that promotes healthy competition between traditional models and projects based on blockchain technology — for instance, regulating platforms and market participants that trade securities alongside nonsecurities digital assets in a manner that does not unduly favor or disadvantage any particular market participant.
Along the same lines, establishing a fair regulatory environment may require considering the distinct features of emerging technologies — for example, assessing the potential incompatibility of rules enacted pursuant to section 17(f) of the Investment Company Act of 1940 with the custody of digital assets, or updating auditing, accounting, and valuation requirements to support digital asset custody. Likewise, given some of the unique characteristics of blockchain technology, it may be necessary to determine whether special considerations are warranted for broker-dealers to meet their best execution obligations, and the appropriate haircut to assess whether a digital asset is readily convertible into cash to satisfy the net capital rule for broker-dealers.
Lastly, how should the SEC address the advantages of digital assets that arguably render sections of the securities law outdated? For instance, proponents argue that the transparency and enhanced security features of blockchain technology make certain brokers, dealers, and custody issues moot.
Conclusion
Digital assets have the potential to revolutionize the global economy and transform the way we transfer value. The interaction between legislative/regulatory development and emerging technology will significantly impact competing market participants and the growth of the fintech industry. The SEC stands at the center of this fascinating dynamic as it navigates its role in protecting investors and facilitating capital formation.
This dynamic raises two crucial policy questions.
First, when technological advancements lead to dilemmas within a regulatory framework, what approach should policymakers and regulators adopt regarding any ensuing competition among market participants? At a recent symposium, Commissioner Peirce remarked that the government should not be in the business of picking winners and losers. In other words, the economy functions most efficiently when the government maintains a fair playing field in structuring its regulatory regime. It is important to note that ensuring a fair playing field should be considered in terms of both government action and inaction. Specifically, failing to update a regulatory regime in response to technological advancements that necessitate such change can have a negative impact on competition just as much as making direct rule changes.
Second, who should be at the forefront of establishing the rules of the road for the industry? On the one hand, the courts play a crucial role, as evidenced by the evolving case law of the Howey test as it relates to digital assets, which is significantly influenced by regulators and the enforcement actions they pursue, and private litigation to a lesser extent. On the other hand, regulators could take the lead through rulemaking and guidance. Alternatively, lawmakers can also lead through legislation. Each approach has its benefits and drawbacks, from the definitive nature of legislation to the flexibility offered by regulatory actions.
As lawmakers and regulators work to modernize regulatory frameworks to address disruptive technological developments in a manner that balances maintaining market integrity with the need to avoid stifling innovation with ill-suited regulatory regimes, allowing new products like the tokenization of assets to thrive, market dynamics such as competitive forces must be considered. Undoubtedly, lawyers will play a vital role in helping market participants navigate the rapidly evolving legal and regulatory landscape of digital assets. Lawyers will need to have a keen intellect and a deep understanding of sociopolitical developments, the regulatory priorities of policymakers and regulators, market dynamics in the fintech industry, and the technology driving these changes in order to help clients navigate this emerging industry, which is filled with risks and opportunities.
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