In-Depth Report on DeFi: SEC's New Policy – From "Innovation Exemption" to "On-Chain Finance", Could There Be Another DeFi Summer?

I. Introduction: SEC's New Policy and a Pivotal Shift in the DeFi Regulatory Landscape

Decentralized Finance (DeFi) has experienced breakneck growth since 2018, becoming one of the core pillars of the global crypto asset ecosystem. Through open and permissionless financial protocols, DeFi offers a wide range of financial features, including asset trading, lending, derivatives, stablecoins, and asset management. It is built on technical foundations such as smart contracts, on-chain settlement, decentralized oracles, and governance mechanisms, which together have enabled DeFi to deeply simulate and reconfigure traditional financial structures. Especially since the "DeFi Summer" in 2020, the total value locked (TVL) in DeFi protocols once surpassed $180 billion, signaling unprecedented scalability and market recognition of this field.

However, the rapid expansion of this sector has come with persistent challenges, including compliance ambiguity, systemic risk, and a vacuum in regulation. Led by former SEC Chair Gary Gensler, U.S. regulators adopted an increasingly stringent approach across the broader crypto industry, with a focus on centralized enforcement. Specifically, DeFi protocols, decentralized exchanges (DEXs), and DAO governance structures came under scrutiny for potential violations such as unregistered securities trading and operating as unregistered brokers or clearing agents. From 2022 to 2024, projects such as Uniswap Labs, Coinbase, Kraken, and Balancer Labs were subject to various forms of investigations and received enforcement letters from the SEC or CFTC. At the same time, the longstanding absence of clear standards for determining whether a project is "sufficiently decentralized", involves "public fundraising", or qualifies as a "securities trading platform" left the DeFi industry mired in multiple challenges such as technological stagnation, capital investment contraction, and developer attrition amid regulatory uncertainty.

This regulatory tone saw a dramatic shift in the second quarter of 2025. In early June, new SEC Chair Paul Atkins proposed a more constructive regulatory path for DeFi during a congressional fintech hearing, outlining three key policy directions: First, the SEC will establish an "Innovation Exemption mechanism" for protocols with a high degree of decentralization, temporarily waiving certain registration requirements within designated pilot programs. Second, a "Functional Categorization Framework" would be promoted, under which protocols would be regulated based on their operational logic and on-chain activities, rather than being automatically classified as securities platforms solely due to their use of tokens. Third, DAO governance structures and Real-World Asset (RWA) tokenization projects would be brought into an open financial regulatory sandbox, using low-risk, traceable regulatory tools to accommodate rapidly evolving technological prototypes. This shift in policy direction aligns with the white paper on systemic risk in digital assets released by the Financial Stability Oversight Council (FSOC) of the U.S. Treasury in May of the same year. The report, for the first time, called for regulatory sandboxes and functional testing as mechanisms to safeguard investors without "stifling innovation".

II. The Evolution of U.S. Regulatory Strategy: From "Presumption of Illegality" to "Functionally Adaptive Regulation"

The evolution of U.S. regulation toward DeFi not only epitomizes how its financial compliance framework responds to the challenges posed by emerging technologies but also vividly reflects how regulators balance "financial innovation" with "risk prevention". The SEC's current policy stance on DeFi is not an isolated instance but rather the result of inter-agency dynamics and the gradual evolution of regulatory logic over the past five years. To understand the basis of this transformation, we must revisit the root of the regulatory attitudes during the early stages of DeFi's rise, the feedback loop triggered by major enforcement events, and the systematic tensions in the application of laws across federal and state jurisdictions.

Since the DeFi ecosystem began taking shape in 2019, the SEC's core regulatory logic has relied heavily on the Howey Test established in 1946, a framework for determining whether certain assets are securities. Under this test, any contractual arrangement that represents an investment in a common enterprise with the expectation of profit solely through the efforts of others may be classified as a securities transaction and thus subject to regulation. Based on this standard, the vast majority of tokens issued by DeFi protocols (particularly those with governance influences or revenue-distribution functions) are presumed to be unregistered securities, thereby posing potential compliance risks. In addition, according to the Securities Exchange Act and Investment Company Act, any activity that matches, clears, holds, or recommends digital assets, without a clear exemption, may constitute violations for operating as an unregistered broker or clearing institution.

Between 2021 and 2022, the SEC launched a series of high-profile enforcement actions. Representative cases include the investigation into whether Uniswap Labs operated as "an unregistered securities trading platform", accusations of "illegal marketing" against protocols such as Balancer and dYdX, and even privacy protocols like Tornado Cash being added to the sanctions list of the U.S. Treasury's Office of Foreign Assets Control (OFAC). These cases revealed the regulator's sweeping, aggressive, and ambiguously defined enforcement strategy in the DeFi space. The regulatory tone during this period could be summarized as one of "presumption of illegality", meaning that project teams bore the burden of proving that their protocol design did not constitute securities transactions or fall under U.S. jurisdiction, or else face compliance risk.

However, this regulatory strategy of "enforcement first, rules later" soon encountered headwinds on both the legislative and judicial fronts. To begin with, many court rulings began to expose the limitations of applying traditional regulatory judgments to decentralized contexts. For instance, in the SEC vs. Ripple case, a U.S. court ruled that XRP did not constitute a security in some secondary market transactions, effectively undermining the SEC's stance that "all crypto tokens are securities". Meanwhile, the continued legal battle between Coinbase and the SEC elevated "regulatory clarity" into a central theme in both industrial and congressional efforts to advance crypto legislation. Second, the SEC has faced fundamental challenges in applying laws to structures like DAOs. Since DAOs operate without a legal representative or centralized beneficiaries in the traditional sense, it is difficult to classify their on-chain autonomy mechanisms as the traditional securities logic of "profits from the efforts of others". Accordingly, regulators have also found themselves lacking effective legal tools to impose subpoenas, fines, or bans, leading to a deadlock in enforcement execution.

It was against this backdrop of mounting institutional consensus that the SEC began to shift its strategy following a leadership change in early 2025. Newly appointed Chair Paul Atkins, a long-time advocate of "technology neutrality" as a regulatory baseline, emphasized that regulatory boundaries for financial compliance should be defined by function rather than by the technical means through which those functions are implemented. Under his direction, the SEC formed an internal DeFi strategy task force and co-launched a DeFi roundtable with the U.S. Treasury, employing tools such as data modeling, protocol testing, and on-chain tracing to construct a system for risk classification and governance evaluation of major DeFi protocols. This tech-driven, risk-tiered regulatory method marks a transition from the traditional logic of securities law to a model of "functionally adaptive regulation", one that grounds policy design in the actual financial functions and behavioral models of DeFi protocols, thereby integrating compliance requirements and technological flexibility.

It should be noted that the SEC has not relinquished its claim to regulatory jurisdiction over the DeFi sector. Rather, it is attempting to build a more flexible and iterative regulatory strategy. For instance, DeFi projects with clearly centralized components (such as frontend interface operations, multisig governance control, or protocol upgrade permissions) will be required to perform registration and disclosure obligations. Meanwhile, for protocols that are highly decentralized and executed entirely on-chain, the SEC may introduce an exemption mechanism based on "technical testing and governance audits". In addition, by encouraging projects to voluntarily enter regulatory sandboxes, the SEC plans to cultivate a compliant "middle ground" for the DeFi ecosystem, provided that market stability is ensured and users' rights and interests are protected. This approach can prevent the collateral damage to technological innovation caused by one-size-fits-all policies.

On the whole, U.S. regulatory approaches to DeFi are gradually evolving, from the early phase of aggressive legal application and enforcement crackdowns toward a model based on institutional consultation, functional identification, and risk-based guidance. This shift not only reflects a deepened understanding of technological heterogeneity but also represents regulators' attempts to introduce new governance paradigms in the face of open financial systems. In future policy implementation, the key challenge for the sustainability of DeFi regulatory institutions in the U.S. and even the world will lie in striking a dynamic balance between protecting investors' interests, ensuring systemic stability, and propelling technological advancement.

III. The Three "Wealth Codes": Revaluation Under Institutional Logic

With the SEC's new regulatory policies now officially in effect, there has been a substantive shift in the general attitude towards DeFi in the U.S. regulatory environment. The transition from ex-post enforcement to ex-ante compliance and then to functionally adaptive regulation has brought long-awaited institutional tailwinds to the DeFi sector. As the new regulatory framework continues to take shape, market participants have begun to re-evaluate the foundational value of DeFi protocols. Many sectors and projects whose valuations had long been suppressed due to "regulatory uncertainty" are now showing strong potential for revaluation and renewed investment appeal. From an institutional logic perspective, the current revaluation in the DeFi sector is unfolding along three main trajectories: the institutional premium on compliant intermediary structures, the strategic importance of on-chain liquidity infrastructure, and the space for credit restoration in protocols with high endogenous yield models. These three directions form the key entry points of the next round of "wealth generation" in DeFi.

First of all, as the SEC emphasizes a "function-oriented approach" to regulation and introduces registration exemptions or sandbox testing mechanisms for certain frontend operations and service-layer protocols, compliant on-chain intermediaries are emerging as a new area of undervalued opportunity. Unlike the early DeFi ecosystem's extreme pursuit of disintermediation, today's regulatory environment and market are generating structural demand for "compliant intermediary services". Especially at critical junctures such as Know-Your-Customer (KYC), on-chain anti-money laundering (AML), risk disclosures, and protocol governance custody, projects with a clear legal person governance structure and service licenses will become indispensable gateways to regulatory compliance. This trend will increase policy tolerance and investor favor toward DID protocols offering on-chain KYC services, compliant custodians, and frontend operation platforms with high governance transparency, leading to a shift in how these entities are valued, from "technical tools" to "institutional infrastructure". It should be noted that the rapidly evolving "compliance chain" modules within certain Layer 2 solutions (such as rollups with whitelist mechanisms) will also play a pivotal role in the rise of this compliant intermediary architecture, offering a credible execution infrastructure that enables traditional financial capital to participate in DeFi.

Second, the on-chain liquidity infrastructure, which serves as the foundational resource allocation engine of the DeFi ecosystem, is regaining strategic valuation support due to its institutional clarity. Liquidity aggregation platforms, represented by decentralized trading protocols such as Uniswap, Curve, and Balancer, faced multiple challenges over the last year, including liquidity depletion, waning token incentives, and pressure from regulatory uncertainty. However, driven by new policies, platforms that offer protocol neutrality, high composability, and transparent governance are once again emerging as the preferred destinations for structural capital inflows into the DeFi ecosystem. In particular, under the principle of "separating protocol from front-end regulation" proposed by the SEC, the legal risk of base-layer AMM protocols that function as on-chain code execution tools will be drastically mitigated. This, combined with the expanding bridge between real-world assets (RWAs) and on-chain assets, is expected to systematically restore both on-chain trading depth and capital efficiency expectations. Furthermore, on-chain oracles and price feed infrastructures represented by Chainlink are becoming key "risk-controllable neutral nodes" in institution-grade DeFi deployments because they are not classified as direct financial intermediaries under current regulatory frameworks. Therefore, they play a vital role in maintaining systemic liquidity and enabling price discovery within a compliance framework.

Third, DeFi protocols with high endogenous yields and stable cash flows are poised to enter a credit restoration cycle as institutional pressure begins to ease, once again attracting risk capital. In earlier stages of DeFi's development, lending protocols such as Compound, Aave, and MakerDAO established themselves as the credit foundation of the entire ecosystem due to their robust collateral models and liquidation mechanisms. However, as the crypto credit crisis unfolded between 2022 and 2023, DeFi protocols experienced balance sheet strain due to liquidation pressure, with frequent incidents of stablecoin depegging and liquidity depletion. Combined with growing concerns over asset security due to regulatory gray areas, most of these protocols faced structural risks, including eroded market trust and low token prices. Today, with a clearer regulatory outlook and establishment of frameworks that formally recognize protocol revenue, governance structures, and auditing mechanisms, these protocols now have the potential to serve as "on-chain stable cash flow vehicles" thanks to their quantifiable, on-chain verifiable real revenue models and low operational leverage. Especially as DeFi stablecoin models evolve toward "multi-collateral and RWA-pegged" frameworks, on-chain stablecoins such as DAI, GHO, and sUSD are expected to build institutional moats, underpinned by clearer regulatory positioning, that enable them to compete with centralized stablecoins (e.g., USDC and USDT), thereby increasing their systemic appeal in institutional portfolio allocation.

It is worth noting that the common logic behind these three strategic directions is a rebalancing process of transforming the "policy perception premium" brought about by the SEC's new regulatory framework into the "market capital pricing power". In the past, DeFi's valuation system relied heavily on speculative momentum and inflated expectations. Due to the lack of institutional moats and fundamental support, it was particularly vulnerable in countercyclical market phases. Now, with regulatory risks easing and legal pathways gaining clarity, DeFi protocols are increasingly able to establish a mechanism of valuation anchor for institutional capital based on real on-chain revenues, compliant service capabilities, and institutional participation thresholds. This mechanism not only allows DeFi protocols to rebuild their "risk premium–return models" but also marks the first time DeFi protocols are equipped with a credit pricing logic akin to that of financial enterprises. In doing so, it lays the institutional groundwork for integration with traditional financial systems, RWA connection channels, and the issuance of on-chain bonds.

IV. Market Response: From Surging TVL to Asset Revaluation

The release of the SEC's new regulatory policy has not only sent a positive signal of cautious acceptance and functional regulation of DeFi at the policy level but has also instantly triggered a chain reaction in the market, forming an efficient positive feedback loop of "regulatory expectations – capital inflow – asset revaluation". The most direct manifestation of this is the significant rebound in DeFi's total value locked (TVL). According to statistics from major data platforms like DefiLlama, within a week of the new policy's issuance, Ethereum-based DeFi TVL surged from approximately $46 billion to nearly $54 billion, up over 17% in a single week, marking the largest weekly increase since the FTX crisis in 2022. Meanwhile, TVL of multiple mainstream protocols, including Uniswap, Aave, Lido, and Synthetix, rose simultaneously, accompanied by a comprehensive recovery in metrics such as on-chain trading activity, gas usage, and DEX trading volumes. This across-the-board market response reflects that clear regulatory signals have, in the short term, effectively eased concerns among both institutional and retail investors about DeFi's potential legal risks, thereby encouraging off-chain capital to return to the sector and driving a fresh injection of structural liquidity.

Driven by this swift return of capital, many leading DeFi assets have undergone revaluation. Governance tokens such as UNI, AAVE, and MKR, for instance, experienced average price hikes ranging from 25% to 60% within the week following the implementation of the new policy, far outpacing the increases of BTC and ETH during the same period. This rebound in price was not merely sentiment-driven. Rather, it reflected a new round of market valuation modeling focused on the cash flow potential and institutional legitimacy of DeFi protocols. Previously, due to uncertainty over compliance, DeFi governance tokens' valuation systems were heavily discounted by the market, with the protocols' real revenue, the value of governance rights, and their growth potential largely unaccounted for in their market capitalization. By contrast, now that institutional pathways are becoming clearer and policy tolerance for operational legitimacy is increasing, the market has begun revising DeFi protocol valuations using traditional financial metrics such as price-to-earnings (P/E) ratios, TVL multiples, and on-chain active user growth models. This return to fundamental valuation methods not only boosts the investment appeal of DeFi assets as "quasi-cash-flow-generating assets" but also marks the DeFi market's transition toward a more mature and quantifiable phase of capital pricing.

Furthermore, on-chain data also reveals how the structure of capital distribution is changing. Following the new policy's release, many protocols saw notable increases in on-chain deposit transactions, user numbers, and average transaction amounts. In particular, among protocols with high degrees of RWA integration (such as Maple Finance, Ondo Finance, and Centrifuge), the share of institutional wallets rose sharply. For example, Ondo's short-term U.S. Treasury token OUSG grew by more than 40% in issuance since the policy launch, demonstrating that some institutional funds seeking compliant paths are now turning to DeFi platforms to allocate capital into on-chain, fixed-return-like assets. At the same time, stablecoin inflows into centralized exchanges declined, while net stablecoin inflows into DeFi protocols started to recover, evidence of the restoration of investor confidence in the security of on-chain assets. There is an emerging trend in which the decentralized financial system is regaining the pricing power over capital. TVL is no longer merely a short-term metric of speculative activity but is gradually evolving into a barometer of asset allocation and capital trust.

It is worth noting that while the current market response has been strong, the asset revaluation process remains in its early stages, and the full realization of the regulatory premium is far from complete. Compared with traditional financial assets, DeFi protocols still face relatively high regulatory trial-and-error costs, governance inefficiencies, and challenges in auditing on-chain data, as a result of which the market remains somewhat cautious despite shifting risk preferences. Nevertheless, this resonance of "shrinking institutional risk and recovering value expectations" is exactly what opens up room for mid-term valuation expansion across the DeFi sector. At present, the price-to-sales (P/S) ratios of many top protocols remain well below their mid-cycle levels during the 2021 bull market. As long as real revenue maintains growth, regulatory certainty will provide upward momentum for their valuation baselines. At the same time, asset revaluation is also influencing token design and distribution mechanisms. For instance, some protocols are resuming buybacks of governance tokens, increasing the proportion of surplus distributed to users, or advancing reforms to staking models tied to protocol revenues, further embedding "value capture" into the market's pricing logic.

V. Future Outlook: DeFi's Institutional Reconstruction and New Cycle

Looking ahead, the SEC's new policy is more than just a compliance-level policy adjustment. It marks a pivotal turning point for the institutional reconstruction of the DeFi industry and its path toward sustainable, healthy development. By clarifying regulatory boundaries and market operating rules, the policy lays the groundwork for DeFi to transition from a phase of "unbridled growth" to a mature market that is "compliant and orderly". Against this backdrop, DeFi not only faces significantly reduced compliance risks but also ushers in a new stage of development characterized by value discovery, business innovation, and ecosystem expansion.

First, from the perspective of institutional logic, DeFi's institutional reconstruction will fundamentally reshape its design paradigms and business models. With a primary focus on automated execution based on "code is law", traditional DeFi protocols often overlook compatibility with real-world legal systems, resulting in potential legal gray areas and operational risks. By clarifying and refining compliance requirements, the SEC's new policy compels DeFi projects to develop dual-identity systems that integrate technological advantages with compliance. For example, key challenges in the design of future DeFi protocols include balancing compliant identity verification (KYC/AML) with on-chain anonymity, clarifying legal liability in protocol governance, and establishing mechanisms for compliance data reporting. By embedding compliance mechanisms into smart contracts and governance frameworks, DeFi will gradually form a new paradigm of "compliance by design", achieving deeper integration between technology and law. This will reduce uncertainty and penalties that may result from regulatory conflicts.

Second, institutional reconstruction will inevitably catalyze the diversification and maturation of DeFi's business models. Previously, the DeFi ecosystem was overly reliant on short-term incentives such as liquidity mining and transaction fees, making it difficult to generate sustainable cash flow and long-term profitability. Under the guidance of the new policy, project teams will shift their focus toward building sustainable revenue models. For instance, they will gradually develop a closed-loop return structure comparable to that of traditional financial assets through methods such as protocol-level revenue sharing, asset management services, the issuance of compliant bonds and collateral assets, and the tokenization of real-world assets (RWA). Especially in terms of RWA integration, signals of regulatory compliance have significantly strengthened institutional trust in DeFi products, enabling a wider array of asset types, such as supply chain finance, real estate securitization, and invoice financing, to enter the on-chain ecosystem. In the future, DeFi will cease to be a mere decentralized trading venue. Instead, it is poised to evolve into an institutionalized financial infrastructure for issuing and managing on-chain assets.

Third, the institutional reconstruction of governance mechanisms will become a key driver of DeFi's next growth cycle. In the past, DeFi governance relied heavily on token-based voting, suffering from excessive decentralization of governance power, low voter participation, and inefficient governance, along with a lack of integration with traditional legal systems. The governance standards introduced by the SEC's new policy have prompted protocol designers to explore more legally robust governance frameworks, enhancing governance legitimacy and enforceability through measures such as registering DAOs as legal entities, legally validating governance actions, and introducing multi-party compliance regulatory mechanisms. Hybrid models may be adopted for future DeFi governance, combining on-chain voting, off-chain protocols, and legal frameworks to create decision-making systems that are transparent, compliant, and efficient. This will not only mitigate risks of power centralization and manipulation in governance processes but also improve protocols' credibility among external regulators and investors, thus laying a solid foundation for DeFi's sustainable development.

Fourth, as compliance and governance systems improve, the DeFi ecosystem will welcome a broader range of participants and undergo a transformation in its capital structure. The new policy has considerably lowered the barriers for institutional investors and traditional financial institutions to enter DeFi. Traditional capital players such as large asset management companies, pension funds, and family offices are actively seeking compliant on-chain asset allocation schemes, which will spur the creation of more customized DeFi products and services tailored to institutional needs. Simultaneously, insurance, lending, and derivatives markets will experience explosive growth in compliant environments, driving full-spectrum coverage of on-chain financial services. In addition, project teams will optimize their tokenomics, reinforcing the internal rationale of tokens as both governance tools and value carriers. This will encourage long-term holding and value-driven investment, mitigate short-term speculative volatility, and inject sustained momentum into the ecosystem's stable growth.

Fifth, technological innovation and cross-chain integration are the technical backbone and driving force behind DeFi's institutional reconstruction. Compliance requirements are driving technological innovations in privacy protection, identity verification, and smart contract security, giving rise to the widespread adoption of privacy-enhancing technologies such as zero-knowledge proofs, homomorphic encryption, and multi-party computation. Meanwhile, cross-chain protocols and Layer 2 scaling solutions will facilitate seamless transfers of assets and data across multiple blockchain ecosystems, breaking down on-chain silos and enhancing overall DeFi liquidity and user experience. In the future, a compliant, multi-chain integrated ecosystem will provide a solid base for DeFi business innovation and promote deeper integration with the traditional financial system, creating a new hybrid financial model that blends "on-chain + off-chain" operations.

Lastly, it should be noted that although DeFi's institutionalization signals a fresh start, challenges persist. There are several key issues concerning DeFi's healthy development in the future, including the stability of policy implementation and international regulatory coordination, the management of compliance costs, the improvement of project teams' compliance awareness and technical capabilities, and the balance between user privacy protection and transparency. All industry stakeholders must work together to promote standard-setting and the development of self-regulatory mechanisms, build a multi-layered compliance ecosystem with support from industry alliances and third-party auditing institutions, and continuously enhance the sector's overall institutionalization level and market trust.

VI. Conclusion: DeFi's New Frontier of Wealth Has Just Begun

As the forefront of blockchain-based financial innovation, DeFi stands at a critical juncture of institutional reconstruction and technological upgrading. The SEC's new policy has fostered an environment that balances regulation with opportunity, driving the industry's transition from unbridled growth toward compliant development. In the future, with ongoing technology breakthroughs and ecosystem refinements, DeFi is poised for broader financial inclusion and value reshaping, establishing itself as a cornerstone of the digital economy. However, the industry must continue to work to address compliance risks, technical security, and user education to truly unlock long-term prosperity in this new frontier of wealth. With the SEC's new policy, the shift from "Innovation Exemption" to "On-Chain Finance" could spark a market-wide breakout, potentially heralding another DeFi summer and triggering a revaluation of blue-chip DeFi tokens.