Author: Kevin, Movemaker researcher; Source: X, @MovemakerCN

Introduction: A historic turn in regulation

The crypto industry reaches a historic turning point in the U.S. regulatory environment in 2025.After a long-standing “enforcement-as-regulation” model created a lot of legal uncertainty, new SEC Chairman Paul Atkins launched the “Crypto Project” initiative in July 2025 to modernize securities regulation and support the administration’s vision of positioning the United States as a “global crypto capital hub.”

One of the core measures of this new regulatory paradigm is the introduction of the “Innovation Exemption” policy.**This exemption is designed as a time-limited regulatory relief to allow nascent crypto technologies and products to enter the market quickly while easing initial compliance burdens before the SEC finalizes permanent rules for digital assets.Atkins has confirmed that the exemption is expected to come into effect in January 2026.The release of this policy signal marks that U.S. regulatory agencies are changing from passive responses to proactive construction, trying to find a more flexible balance between investor protection and industry innovation.

This article will provide an in-depth analysis of the core mechanism of the SEC’s innovation exemption, its strategic positioning in the overall U.S. encryption regulatory framework, assess the market controversies and opportunities arising from it, and compare it in the global competitive environment, especially with the EU MiCA regulations, to provide strategic suggestions for industry participants.

1. Core mechanism and objectives of innovation exemption

The core of the SEC’s innovative exemption is to provide a temporary channel for a “safe harbor” that allows digital asset companies to operate without immediately bearing the burden of full registration and disclosure under traditional securities laws.

1.1 Scope and duration of exemption

The innovation exemption has a wide scope of application, and any business entity that develops or operates crypto-assets can apply, including trading platforms, DeFi protocols, stablecoin issuers and even DAOs.

• Time bound design: The exemption period is usually set at 12 to 24 months, which is intended to provide project teams with sufficient “incubation period” to promote their network to achieve “maturity” or “fully decentralized”.

• Simplify registration: During the exemption period, projects are required to submit only simplified disclosures and are not required to complete complex and time-consuming S-1 registration documents.This mechanism is similar to the “on-ramp” design of the CLARITY Act that Congress is advancing, which allows startups to raise up to $75 million per year from the public without fully complying with SEC registration rules, provided that they meet disclosure requirements.

1.2 Principle-based compliance conditions

Atkins stressed that the exemption would be based on principles rather than rigid rules.Companies using exemptions are still required to meet basic compliance standards and investor protection measures, such as:

• Periodic reporting and review: May be required to submit quarterly operating reports and be subject to periodic review by the SEC.

• investor protection: For projects targeting retail investors, risk warnings and investment limits must be established.

• technical standards: Conditions may include requiring projects to use whitelists or pools of certified participants, or even adhere to standards-based restrictions such as ERC-3643.

1.3 Token classification and “decentralization” testing

The innovation exemption operates under the SEC’s emerging token classification system, which is designed to determine which digital assets are securities based on the principles of the Howey test.

• Classification system: SEC divides digital assets into four major categories:Commodity/network tokens (such as BTC), utility tokens (Utility Tokens), collectible tokens (NFTs), and tokenized securities.

• exit path: If the first three types of assets meet the conditions of “sufficient decentralization” or “functional integrity”, they can be separated from the securities regulatory framework.Once an investment contract is deemed “closed,” subsequent transactions in the token will not automatically be considered a “securities transaction,” even if the token was originally issued as a security.This mode of transfer of control provides a clear regulatory exit path for the project.

• Meaning of exemption: Under this framework, the SEC directed staff to clarify when digital assets constitute securities, emphasizing that most crypto-assets are not securities and that, even if they are, regulation should encourage rather than discourage their development.

2. Strategic context for innovation exemptions: synergies with congressional legislation

The SEC’s innovation exemption is not an isolated administrative action. Together with the two major legislative pillars “CLARITY Act” and “GENIUS Act” being advanced by Congress, it constitutes the new encryption regulatory system in the United States.

2.1 Clarifying jurisdiction: Supplement to the CLARITY Act

The CLARITY Act was designed to resolve a long-standing jurisdictional conflict between the SEC and the Commodity Futures Trading Commission (CFTC).

• Core division of labor: The CLARITY Act places primary issuance/fundraising activities under the jurisdiction of the SEC, while explicitly assigning regulatory authority to digital commodity spot trading to the CFTC.

• Mature blockchain testing: The CLARITY Act introduces a “mature blockchain” test to determine when a project has reached a sufficient degree of decentralization to qualify for more relaxed regulatory treatment (i.e., to be considered a digital commodity).Such tests include criteria such as decentralized token ownership, governance participation, and functional independence from any single controlling group.

• exempt cooperation: The Innovation Exemption provides a temporary transition period for start-up projects that are in a state of “maturity of intent.”It allows these projects to conduct limited fundraising and product trials with simplified disclosure while working toward full decentralization.This means that administrative exemptions and the delineation of legislative drafts are highly synergistic: exemptions are temporary administrative “trial” permissions, while the CLARITY Act provides permanent legislative “graduation” standards.

2.2 Segregation of Stablecoin Framework: Effectiveness of the “GENIUS Act”

The GENIUS Act was signed into law in July 2025, becoming the first comprehensive federal digital asset legislation in the United States.

• The status of stablecoins: The GENIUS Act explicitly excludes payment stablecoins from the definition of “security” or “commodity” under the federal securities laws and the Commodity Exchange Act, placing them under the supervision of banking regulators such as the OCC.

• issuance requirements: The bill requires approved stablecoin issuers to reserve with highly liquid assets (including only U.S. dollars, Treasury bills, etc.) at a 1:1 ratio and prohibits the payment of interest or earnings.

• regulatory impact: Since the GENIUS Act has clarified the regulatory framework for payment of stablecoins and the qualification requirements for issuers, the SEC’s innovation exemptions will mainly focus on more innovative areas other than stablecoins, such as DeFi protocols and new network tokens, to avoid duplication or conflicting supervision in the field of stablecoins.

2.3 Institutional cooperation and market supervision

The SEC and CFTC announced that they will increase regulatory coordination through joint statements and joint roundtables to address uncertainty across agency jurisdictions.

• spot trading: The joint statement clarified that exchanges registered with the SEC and CFTC are allowed to facilitate trading of certain spot crypto asset products, reflecting the regulators’ desire to encourage market participants to freely choose their trading venues.

• Waiver Coordination: One of the topics discussed at the joint roundtable is the “innovation exemption” and the supervision of DeFi.This coordination is critical to reducing compliance gaps among market participants.

3. The “traditionalization” risk of DeFi

The rollout of the SEC’s innovation exemption sparked a sharply polarized response in the crypto industry.

3.1 Opportunities for Innovators and Compliators

For startups and existing platforms seeking to operate compliantly in the United States, the innovation exemption brings real benefits:

• Reduce entry costs: In the past, if an encryption project wanted to operate compliantly in the United States, it might have cost millions of dollars in legal fees and more than a year.The Innovation Exemption significantly reduces compliance thresholds and time costs for start-up teams by simplifying disclosure procedures and providing a clear transition framework.

• attract venture capital: A clear regulatory path will allow projects that originally chose to “leave” or be stationed overseas due to regulatory ambiguity to reconsider the U.S. market.Policy certainty helps attract institutional investors and venture capital, as they value the ability to invest within a clear framework.

• Promote product innovation: The exemption period allows a range of new crypto concepts to be experimented under the new framework, especially the emerging DeFi and Web3 ecosystems.For example, companies like ConsenSys thrive in regulatory-permissive environments and are able to quickly test decentralized applications.

• Good for large organizations: Traditional financial giants (such as JPMorgan Chase and Morgan Stanley) are actively embracing digital assets.The SEC’s cancellation of SAB 121, an accounting standard that had forced custodians to record customers’ crypto assets as on-balance sheet liabilities, has cleared a major obstacle for banks and trust companies to provide digital asset custody services on a large scale.Coupled with the administrative flexibility provided by the innovation exemption, these agencies can enter the crypto space with lower regulatory capital costs and a clearer legal path.

3.2 DeFi community’s concerns and “traditionalization” risks

The core controversial point of the exemption policy lies in its impact on the concept of decentralization:

• Mandatory user verification (KYC/AML): The new regulations require that all projects participating in the exemption must implement “reasonable user verification procedures,” which means that DeFi protocols need to implement KYC/AML procedures.

• Agreement splitting and control: To be compliant, DeFi protocols may need to split liquidity pools into “permissioned pools” and “public pools” and be required to adopt compliant token standards such as ERC-3643.ERC-3643 aims to embed identity verification and transfer restriction functions into smart contracts. If every transaction needs to be checked against a whitelist, and tokens can be frozen by a centralized entity, then whether DeFi is still true DeFi has been questioned.Industry leaders such as the Uniswap founder believe that regulating software developers as financial intermediaries will harm U.S. competitiveness and stifle innovation.

3.3 Opposition from traditional financial institutions

The traditional financial industry has also expressed opposition to the “innovation exemption”, fearing that it will form “regulatory arbitrage.”

• Same assets, different rules: The World Federation of Exchanges (WFE) and Citadel Securities, among others, sent a letter to the SEC urging it to abandon its “innovation exemption” program, arguing that providing a broad exemption for tokenized securities would create two separate regulatory regimes for the same asset.

• Adhere to traditional protection: The Securities Industry and Financial Markets Association (SIFMA) emphasizes that tokenized securities must comply with the same basic investor protection rules as traditional financial assets.They believe that loosening regulations will increase market risks and fraud.

4. Global regulatory comparison: strategic differences between the US and European models

The SEC’s innovation exemption and the more flexible U.S. model, as represented by the EU’s MiCAEx-ante coordination and unification model, forming two poles of global digital asset regulation, with significant differences between the two at the philosophical and operational levels.

The “transfer of control” philosophy of the American Innovation Exemption and CLARITY Act contrasts sharply with MiCA’s “prior authorization” model.The American model tolerates initial uncertainty and higher risk exposure in exchange for the speed and flexibility of innovation, which is most attractive to small and medium-sized financial technology companies and start-ups.AndMiCA adopts structural guarantees and unified rules, providing large established financial institutions such as JP Morgan with a stable, predictable market across the EU.

This regulatory divergence necessitates a dual “market-to-market” compliance strategy for global companies, to address the different classification and operational requirements for the same product (e.g., USD-pegged stablecoin) in two major jurisdictions.

5. Market Outlook and Summary

The formal implementation of the SEC’s innovation exemption policy is a key step in the maturity of the U.S. encryption regulatory system. It not only provides an administrative “safe harbor”, but also profoundly affects the geographical flow of global digital asset innovation in the next few years, marking 2026 as the first year of “compliance innovation.”With innovative exemptions and the unprecedented legal certainty granted by the CLARITY Act, the U.S. crypto industry will attract a large amount of institutional funds and accelerate the transformation of crypto assets from the fringe of traditional finance to a “structured asset class.”

For industry players eager to seize the dividends of this round of policies, the strategic focus must be clear: start-ups should regard the exemption period (12 to 24 months) as a low-cost, quick window to enter the U.S. market, but must regard “full decentralization” as the ultimate goal of operations.This means teams must design a clear decentralized roadmap based on “control” rather than relying on vague “sustained effort” criteria.Projects that fail to achieve verifiable decentralization on time will face high traceability compliance risks.In addition, given that the requirements for implementing KYC/AML on DeFi protocols involved in the exemption policy are still controversial, projects that are unable to be fully decentralized technically and are unwilling to adopt compliance standards such as ERC-3643 may need to consider abandoning the US retail market after the exemption period.

Despite breakthroughs at the executive and legislative levels in the United States, the challenge of global regulatory fragmentation remains daunting.The divergence between the US’s flexible model and the EU’s MiCA’s strict, ex-ante authorization model will continue to lead to “regulatory arbitrage” by companies around the world.To create a level playing field and ensure consumer protection regardless of geographic location,The future development of the industry urgently requires international coordination.In the long term, one possible prediction is thatMajor jurisdictions may move towards adopting a common underlying framework by 2030, including unified AML/KYC standards and stablecoin reserve requirements, which will promote interoperability and institutional adoption globally.

The SEC’s innovation exemption policy is a milestone in the U.S. regulatory system’s shift from “vague suppression” to “clear regulations.” It attempts to use administrative flexibility to make up for legislative lag, providing digital assets with a transition path toward compliance while maintaining vitality.For the encryption industry, the opening of this door of exploration means that the era of barbaric growth is over.“Compliance innovation” will become the core competitiveness through the cycle.The next phase of crypto will no longer be built solely on code, but will rely more on clear asset allocation and regulatory frameworks.The key to a company’s success lies in its ability to unswervingly move towardVerifiable decentralization and a robust compliance bottom line, thereby turning regulatory complexity into a competitive advantage in global markets.