Tokenized Stocks Get a Sandbox. Crypto Deserves a Statute

Crypto regulation is finally accelerating—but only for the parts that look like Wall Street. On 12 May, SEC Chair Paul Atkins announced plans to establish clear guidelines for crypto tokens classified as securities. The proposal seeks to rationalize rules for their issuance, custody, and trading. It follows a string of notable developments: in March, lawmakers reintroduced the Financial Innovation and Technology for the 21st Century Act (FIT21), and in January, President Trump issued an executive order directing agencies to coordinate on digital financial technology.

While these initiatives reflect growing momentum, they also underscore a deeper problem: digital asset regulation remains fragmented, incomplete, and institutionally incoherent. As I argue in my recent article, crypto law will remain ineffective until it adopts a function-based approach.

Here is problem number one: crypto is built on decentralized infrastructure. Blockchain technology distributes power, replaces intermediaries with protocol rules, and eliminates central actors. But traditional legal systems presume centralization. They rely on registrants, boards, and officers. Blockchain-based platforms, by contrast, often have no CEO to incarcerate, no address for service of process, no secretary to audit, and no board to sue.

Problem number two: blockchain technology enables a range of economic functions. It is analytically unsound to treat all tokens as ‘securities’ merely because they rely on shared infrastructure. Some tokens represent voting rights (Compound). Some track inventory or logistics. Others function as payment systems (USDC) or enable smart contract execution (Ethereum staking). Still others are investment contracts and should be regulated accordingly. The law must focus on what tokens do—not what they are. This is the essence of a function-over-form approach.

Commissioner Hester Peirce’s recent sandbox proposal of an exemptive order that would allow firms to use DLT to issue, trade, and settle securities, previewed earlier this month, is not about Bitcoin or DeFi. It’s a targeted exemption framework designed to allow regulated broker-dealers and exchanges to experiment with tokenized versions of traditional assets—like stocks and bonds—on blockchain rails. This is not about crypto-native systems. It’s about modernizing the plumbing of capital markets.

Under the proposal, eligible firms could obtain conditional relief from certain SEC rules while still operating under full registration. It’s thoughtful and useful—but deliberately narrow. The sandbox does not extend to the assets that generate the greatest legal uncertainty: non-traditional tokens, including those used in decentralized applications, protocol governance, or as staking instruments. It does not address the legal status of private token offerings, resale restrictions, or the secondary trading of exempt securities.

In short: the sandbox is built for institutions looking to tokenize Wall Street—not for developers building the next financial layer of the internet.

The SEC cannot solve this problem alone. What crypto needs is statutory clarity—and unfortunately, the only active legislative proposal is not up to the task.

And this status quo—piecemeal agency action without legislative foundation—has real consequences. The U.S. crypto market remains defined more by what cannot be done than what is permitted. Developers delay or abandon projects because they cannot assess legal exposure. Startups hesitate to register when the pathway is undefined. And offshore platforms exploit the vacuum, knowing enforcement is uneven and risk becomes a game of chance. While the sandbox may help institutional innovation, it does little to support crypto-native experimentation or long-term ecosystem development.

To be fair, we should not expect the SEC to solve a structural problem that transcends its mandate. Commissioner Peirce is doing what she can with limited tools and jurisdiction. But crypto markets cut across securities, commodities, payments, banking, and communications. No single agency can coherently regulate a system designed to be decentralized. What’s needed is not more creative exemptions—it is legislative clarity.

The Supreme Court’s decision in Loper Bright Enterprises v. Raimondo underscores the urgency. By overturning the Chevron doctrine, the Court eliminated judicial deference to agency interpretations of ambiguous statutes. Courts must now apply independent judgment to agency rulemaking. This shift makes all regulatory initiatives—including SEC sandbox efforts—more susceptible to litigation and reversal. As SCOTUSblog notes, agencies now operate under heightened scrutiny and diminished flexibility. Without congressional authorization, agency-led frameworks rest on fragile ground.

That’s why the reintroduction of FIT21 warrants attention. The bill attempts to allocate oversight functionally, assigning commodities regulation to the CFTC and securities regulation to the SEC.

This is a meaningful step. It moves away from the presumption that all tokens are securities. But FIT21 still embeds flawed proxies like ‘decentralization’ as jurisdictional triggers. Scholars have warned that decentralization is notoriously hard to define, easy to game, and poorly correlated with investor risk. Under FIT21, token issuers can self-certify that their networks are decentralized—unless the SEC objects within 60 days. Critics warn this creates loopholes. Others observe the bill fails to engage with infrastructure-level tokens, staking models, and emergent governance systems—elements core to how crypto works in practice.

The problem is not that FIT21 tries to regulate. The problem is that it builds a function-based structure on a faulty foundation. Jurisdiction should be determined by what a token does—not by unverifiable assertions about its network’s decentralization. The critical variables are what rights the token confers, how it is marketed, who controls it, and whether the public bears its risks.

A better framework would regulate by economic function: distinguishing capital formation from payments infrastructure, governance tokens from commodities, and speculative instruments from consumer-facing applications. If Congress wants to legislate for crypto, it must regulate by use—not origin story.

Commissioner Peirce’s sandbox should be recognized for what it is: a thoughtful effort to pilot market modernization. But crypto needs more than modernization. It needs categorization, calibration, and coherence. In this new post-Chevron era, agency-led innovation is no substitute for legislative action. If the United States is serious about digital markets, it must move beyond slogans and categories. It must write the rulebook.

And that rulebook should be built on function—not form.

The author’s full article is available here, forthcoming in the Louisiana Law Review.

Seth C. Oranburg is a Professor of Law at the University of New Hampshire Franklin Pierce School of Law and Co-Director of the Program on Organizations, Business, and Markets at New York University’s Classical Liberal Institute.