a16z: After Securities Move On-Chain, Why Will Intermediary Institutions Be Replaced by Code?

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Original Authors: @milesjennings, @rstwalker and Aiden Slavin, a16z mật mã

Original Compilation: Peggy, BlockBeats

Editor’s Note: When regulators begin actively promoting the “on-chain migration of traditional securities,” the question is no longer about technical feasibility, but whether the institutional framework is ready to keep pace.

This article centers on a key proposal: In the context of the U.S. Securities and Trao đổi Commission (SEC) advancing the on-chain migration of financial markets, a16z and the DeFi Education Fund have proposed a “Software Safe Harbor” framework, attempting to delineate regulatory boundaries for a new class of market participants—non-custodial, disintermediated blockchain applications.

The core logic is not complicated: If these applications are merely neutral software interfaces that do not control assets, execute trades, or provide advice, should they still be subject to the regulatory framework of the traditional broker-dealer system?

The analysis by former SEC Chief Economist Craig Lewis provides a more structured answer to this question. Instead of starting from “whether to regulate,” he returns to a more fundamental comparison: Given the existing high costs and opacity within the current broker-dealer system, does introducing on-chain trading and automated settlement weaken the market, or does it restructure its mode of operation?

On one hand, atomic settlement, on-chain transparency, and 24/7 trading are rebất chấpning the efficiency boundaries of financial infrastructure. On the other hand, investor protection mechanisms, market fragmentation, and new types of risks are also emerging simultaneously. The real divergence lies not in whether these risks exist, but in whether they already exist in another form within the traditional system, having been overlooked for a long time.

From this perspective, the “Safe Harbor Proposal” resembles an institutional experiment: it attempts to open a limited but verifiable space for on-chain finance without completely overturning the existing regulatory framework. Consequently, the key question shifts from “whether to go on-chain” to “which parts can go on-chain first.”

If the past decade of the crypto industry has been about approaching traditional finance on a technical level, then the next true variable may come from how regulation redefines the role boundaries of “intermediaries.”

The following is the original text:

Bringing traditional securities on-chain is one of the core priorities of the current U.S. Securities and Exchange Commission (SEC). Recognizing the potential of tokenization, under the leadership of Chairman Atkins, the Commission launched “Project Crypto” nine months ago, aiming to update U.S. securities-related rules and the regulatory system. Its goal is to gradually migrate the national financial markets on-chain, thereby achieving a series of 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 peer-to-peer without intermediaries.

Based on this, together with the DeFi Education Fund, we submitted a “Software Safe Harbor” proposal to the SEC last August. It clearly defines under what conditions this type of blockchain-based application—programs that act as neutral software, enabling users to interact with public blockchain networks and smart contract protocols—can be exempt from the registration requirements of the Securities Exchange Act of 1934. This proposal not only explains how these applications create value for market participants but also demonstrates how they align with the SEC’s core mission of protecting investors, maintaining fair and orderly markets, and facilitating capital formation.

Today, Vanderbilt University professor and former SEC Chief Economist and Director of the Division of Economic and Risk Analysis, Craig Lewis, has formally submitted his economic analysis report on this “Software Safe Harbor” proposal to the SEC. While Lewis’s research focuses on the proposal itself, it more broadly assesses the economic costs and benefits of tokenized securities, providing important insights into how blockchain technology can reshape the traditional financial system. Although this study received funding support from a16z, Professor Lewis employed an independent and rigorous methodology in his evaluation.

In his analysis, Lewis outlines five potential benefits that this safe harbor mechanism could unlock for compliant applications:

Atomic Settlement: Eliminates counterparty credit risk arising from delayed settlement and reduces systemic risk stemming from potential central counterparty failures.
On-Chain Transparency: Replaces opaque private ledger systems with publicly verifiable transaction records.
24/7 Continuous Trading: Breaks through the time and geographical limitations of traditional exchanges, enhancing price discovery efficiency and liquidity.
Substantial Cost Reduction: Automates processes like dividend distribution and compliance through smart contracts. For example, research by Ripple and BCG shows that tokenizing investment-grade bonds can reduce operational costs by 40% to 60%.
Lowering Barriers to Entry: Attracts new developers into the market, creating competitive pressure on traditional financial institutions, driving their innovation, ultimately benefiting users.

Simultaneously, Lewis also points out four categories of potential costs that this proposal might bring:

Potential Weakening of Investor Protection: For instance, traditional broker-dealers can freeze assets or reverse transactions, whereas compliant applications are not designed to have this capability.
Regulatory Arbitrage Risk: Some traditional institutions might attempt to transform into compliant applications to evade regulatory obligations, although their transformation costs could be high.
Chợ Fragmentation Risk: Trading of tokenized securities could further fragment market liquidity and transmit risks to the traditional financial system through DeFi leverage mechanisms. However, Lewis believes this should be assessed in comparison to the existing dark pools and over-the-counter trading systems.
Retail Trading Cost Issues: Such as risks from gas fee volatility, slippage, and smart contract vulnerabilities. But these should be compared against implicit costs in traditional finance. Meanwhile, DeFi fees are dropping significantly; for example, Ethereum’s Dencun upgrade has reduced L2 data costs by over 90%.

Lewis’s analysis is specifically limited to front-end applications that meet the safe harbor conditions, emphasizing that these applications are essentially “passive software interfaces” whose design does not introduce the risks the Securities Exchange Act seeks to avoid. These conditions include:

Non-custodial architecture
No autonomous trade execution authority
No marketing or investment advice
Only connecting to genuinely decentralized (or actively moving towards decentralization) protocols

He further points out that the benchmark for comparison should not be some idealized market structure, but the current broker-dealer system—which contains numerous implicit costs, such as DTC fees, clearing and settlement fees, intermediary markups, and insurance buffers.

Ultimately, Lewis concludes: If the SEC conducts a formal assessment of these costs and benefits, it is likely to find that this safe harbor mechanism helps unlock the significant economic value embedded in tokenized securities.

As Chairman Atkins stated, tokenization “has the potential to reshape the financial system as we know it.” The SEC has already expressed support for this direction through initiatives like “Project Crypto” and joint guidance documents.

However, to truly realize this vision, a clear and effective regulatory framework is still needed for those blockchain applications that support peer-to-peer trading. This is precisely the goal of this safe harbor proposal, and Professor Lewis’s analysis also indicates that its overall economic rationale is sufficiently compelling—despite trade-offs, the benefits are likely to outweigh the costs.

Lewis has charted the path; we look forward to the Commission moving forward along it.

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