SEC Faces Urgent Need to Adapt to Crypto and Blockchain Innovation

The U.S. Securities and Exchange Commission (SEC) has long been recognized as a pivotal financial regulator, ensuring the fairness and accessibility of capital markets. However, its continued relevance hinges on its ability to not only respond to innovation but also to foster it proactively. Over nearly a century, the SEC has adapted to evolving markets, new technologies, and increased retail participation. At its best, the agency has embraced innovation to enhance transparency, investor protection, and capital formation. However, recent years have seen a shift, particularly in its approach to crypto and blockchain technologies.

The SEC's approach to crypto and blockchain has been notably cautious, often veering into hostility. Instead of issuing clear rules, the agency has pursued a scattershot enforcement campaign, often targeting firms seeking to comply in good faith. This has led to a situation where American crypto companies have fled overseas, and a global industry has flourished without U.S. involvement. Even the approval of spot bitcoin ETFs in 2024 came only after being forced by a federal court, highlighting the SEC's reluctance to adapt.

Despite these challenges, there is an opportunity for the SEC to course-correct. With a change in leadership and a more open posture emerging, the SEC has a chance to build innovation into its DNA. This involves revising its mandate to explicitly include the promotion of innovation and modernization, alongside investor protection, market integrity, and capital formation. The SEC should also rethink its metrics of success, looking beyond enforcement actions to capital formation, investor confidence, and the safe adoption of new technologies.

Creating an Innovation Office within the SEC could engage with entrepreneurs, technologists, and academics to guide responsible innovation. This office could serve as a dedicated, empowered team to foster innovation, similar to offices in other regions. Additionally, adopting risk-based regulation, such as pilot programs, safe harbors, and regulatory sandboxes, could help innovators test ideas while maintaining appropriate guardrails. Investing in education and training for SEC staff to enhance their fluency in emerging technologies is also crucial.

These steps are not radical but are proven tools drawn from the SEC's own playbook. In a global race to define the future of finance, the SEC has a choice: lead or fall behind. Its greatest strength has always been its credibility and ability to adapt. The next generation of investors and entrepreneurs will not wait for 20th-century rules to catch up to 21st-century innovation. If the SEC wants to remain the gold standard, it must adapt once again—not just to the present, but to what comes next.