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

Introduction: A Historic Turning Point in Regulation

The crypto industry witnessed a historic turning point in the US regulatory environment in 2025. After a long period of "enforcement as regulation" leading to significant legal uncertainty, SEC Chairman Paul Atkins launched the "Crypto Project" initiative in July 2025, aiming to modernize securities regulation and support the executive branch's vision of positioning the US as a "global crypto capital hub."

One ​​of the core initiatives of this new regulatory paradigm is the introduction of the "Innovation Exemption" policy.** This exemption is designed as a time-limited regulatory leniency, aiming to allow emerging crypto technologies and products to enter the market quickly while mitigating initial compliance burdens before the SEC finalizes permanent rules for digital assets. Atkins has confirmed that the exemption rule is expected to take effect in January 2026. This policy signal signifies that US regulators are shifting from a reactive to a proactive approach, seeking a more flexible balance between investor protection and industry innovation. This article will delve into the core mechanism of the SEC's innovation exemption, its strategic positioning within the overall US crypto regulatory framework, assess the controversies and opportunities it presents, and compare it globally, particularly with the EU's MiCA regulations, to provide strategic advice for industry participants.

1. Core Mechanism and Objectives of the Innovation Exemption

The core of the SEC's innovation exemption lies in providing a temporary "safe harbor" channel, allowing digital asset companies to operate without immediately bearing the full burden of registration and disclosure under traditional securities laws.

1.1 Scope and Duration of the Exemption

The innovation exemption has a broad scope; any entity that develops or operates a business related to crypto assets can apply, including trading platforms, DeFi protocols, stablecoin issuers, and even DAOs.

• Time Limit Design: The exemption period is typically set at 12 to 24 months, designed to provide project teams with sufficient "incubation time" to allow their networks to "mature" or "fully decentralized."

• Simplified Registration: During the exemption period, projects only need to submit simplified disclosures instead of completing the complex and time-consuming S-1 registration documents. This mechanism is similar to the "on-ramp" design in the CLARITY Act currently being pushed forward by Congress, which allows startups to raise up to $75 million annually from the public, provided they meet disclosure requirements, without having to fully comply with SEC registration rules.

1.2 Principle-Based Compliance Conditions

Atkins emphasizes that this exemption will be based on principles rather than rigid rules. Companies using the exemption will still need to meet basic compliance standards and investor protection measures, such as:

• Regular Reporting and Review: Quarterly operating reports may be required, subject to periodic SEC reviews.

• 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 certified participant pools, or even complying with standards-based restrictions such as ERC-3643.

• Technical Standards

1.3 Token Classification and “Decentralization” Test

The operation of the innovation exemption relies on the SEC’s emerging token classification system, which aims to determine which digital assets are securities based on the principles of the Howey Test.

• Classification System: The SEC classifies digital assets into four categories: **commodity/network tokens (such as BTC), utility tokens, collectible tokens (NFTs), and tokenized security tokens**.

• Exit Path: If the first three categories of assets meet the conditions of "sufficient decentralization" or "functional integrity," they can be removed from the securities regulatory framework. Once an investment contract is deemed "closed," subsequent transactions will not automatically be considered "securities transactions," even if the token was initially issued as a security. This model of control transfer provides projects with a clear regulatory exit path. The significance of the exemption: Within this framework, the SEC instructs its staff to clarify when digital assets constitute securities and emphasizes that most crypto assets are not securities, and even if they are, regulation should encourage rather than prevent their development. 2. Strategic Background of the Innovation Exemption: Synergy with Congressional Legislation The SEC's innovation exemption is not an isolated administrative action; it, along with the two major legislative pillars being pushed forward by Congress, the CLARITY Act and the GENIUS Act, constitutes the new US crypto regulatory system. 2.1 Clarifying Jurisdiction: A Supplement to the CLARITY Act The CLARITY Act aims to resolve the long-standing jurisdictional conflict between the SEC and the Commodity Futures Trading Commission (CFTC). Core Division of Labor: The CLARITY Act places primary offerings/fundraising activities under the jurisdiction of the SEC, while explicitly granting the CFTC regulatory authority over spot trading of digital commodities. Mature Blockchain Testing: The CLARITY Act introduces a “mature blockchain” test to determine when a project achieves sufficient decentralization to qualify for more lenient regulatory treatment (i.e., being considered a digital commodity). This testing includes criteria such as decentralized token ownership, governance participation, and functional independence from any single controlling group. The accompanying exemption: The innovation exemption provides a temporary transition period for startups in the "intent-maturity" stage. It allows these projects to conduct limited fundraising and product testing with simplified disclosures while striving for full decentralization. This means that the demarcation between the administrative exemption and the draft legislation is highly synergistic: the exemption is a temporary administrative "trial run" permit, while the CLARITY Act provides a permanent legislative "graduation" standard. 2.2 The Separation of the Stablecoin Framework: The Enactment 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. **Status of Stablecoins:** The GENIUS Act explicitly excludes payment stablecoins from the definitions of "securities" or "commodities" under federal securities and commodity exchange laws, placing them under the supervision of banking regulators such as the OCC. **Issuance Requirements:** The Act requires approved stablecoin issuers to maintain reserves at a 1:1 ratio with highly liquid assets (including only US dollars, Treasury bills, etc.) and prohibits the payment of interest or yield. **Regulatory Impact:** Since the GENIUS Act has clearly defined the regulatory framework for payment stablecoins and the qualification requirements for issuers, the SEC's innovation exemptions will primarily focus on more innovative areas outside of stablecoins, such as DeFi protocols and new network tokens, avoiding duplicate or conflicting regulations in the stablecoin field. 2.3 Institutional Cooperation and Market Oversight The SEC and CFTC announced that they will strengthen regulatory coordination through a joint statement and a joint roundtable to address uncertainties surrounding cross-agency jurisdiction. Spot Trading: The joint statement clarifies that exchanges registered with the SEC and CFTC are permitted to facilitate trading in certain spot crypto asset products, reflecting the regulators' willingness to encourage market participants to freely choose their trading venues. Exemption Coordination: One of the topics discussed at the joint roundtable was the "innovation exemption" and the regulation of DeFi. This coordination is crucial for reducing compliance gaps among market participants.

3. The “Traditionalization” Risk of DeFi

The introduction of the SEC innovation exemption has triggered a strong polarized reaction in the crypto industry.

3.1 Opportunities for Innovators and Compliant Players

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

• Reduced entry costs: In the past, a crypto project might have needed to spend millions of dollars in legal fees and more than a year to operate compliantly in the United States. The innovation exemption significantly lowers the compliance threshold and time costs for startups by simplifying disclosure procedures and providing a clear transition framework. Attracting Venture Capital: A clear regulatory path will encourage projects that previously chose to "leave" or establish themselves overseas due to regulatory ambiguity to reconsider the US market. Policy certainty helps attract institutional investors and venture capital, as they value the ability to invest within a clear framework. Fostering Product Innovation: The exemption period allows a range of new crypto concepts to be tested under the new framework, especially the emerging DeFi and Web3 ecosystems. For example, companies like ConsenSys are thriving in a lenient regulatory environment, enabling them to quickly test decentralized applications. Benefiting Large Institutions: Traditional financial giants such as JPMorgan Chase and Morgan Stanley are actively embracing digital assets. The SEC's removal of SAB 121 (an accounting standard that previously forced custodians to record clients' crypto assets as on-balance-sheet liabilities) has cleared a major hurdle for banks and trust companies to scale up their digital asset custody services. Coupled with the administrative flexibility afforded by the innovation exemption, these institutions can enter the crypto space with lower regulatory capital costs and a clearer legal path. 3.2 Concerns and "Traditionalization" Risks in the DeFi Community The core controversy surrounding the exemption policy lies in its impact on the decentralized philosophy: Mandatory User Verification (KYC/AML): The new regulations require all projects participating in the exemption to implement a "reasonable user verification process," meaning that DeFi protocols need to implement KYC/AML procedures.

• Protocol Splitting and Control: For compliance, DeFi protocols may need to split liquidity pools into "permissioned pools" and "public pools" and are required to adopt compliance 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 centralized entities, then whether DeFi is still true DeFi is questioned. Industry leaders such as the founder of Uniswap believe that regulating software developers as financial intermediaries will harm US 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 create "regulatory arbitrage."

• Same Asset, Different Rules: Companies such as the World Federation of Exchanges (WFE) and Citadel Securities have written to the SEC urging it to abandon its "innovation exemption" program, arguing that providing broad exemptions for tokenized securities would create two separate regulatory regimes for the same asset.

• Upholding Traditional Protections: 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 relaxing regulations will increase market risk and fraud.

4. Global Regulatory Comparison: Strategic Differences Between the US and European Models

The SEC's innovative exemptions and the more flexible US model, compared with the EU's MiCA representing a pre-harmonized and unified model, form two poles in global digital asset regulation, with significant differences between the two at both philosophical and operational levels.

The “transfer of control” concept of the US Innovation Exemption and the Clarity Act contrasts sharply with the “ex-ante authorization” model of MiCA. The US model tolerates initial uncertainty and higher risk exposure in exchange for speed and flexibility in innovation, making it most attractive to small and medium-sized fintech companies and startups. MiCA, on the other hand, provides large, established financial institutions (such as JPMorgan Chase) with a stable and predictable market across the EU through structural safeguards and uniform rules. This regulatory divergence forces global companies to adopt a dual “market-to-market” compliance strategy to address the different classifications and operational requirements for the same product (e.g., a dollar-pegged stablecoin) in two major jurisdictions. 5. Market Outlook and Summary The formal implementation of the SEC's Innovation Exemption policy is a crucial step towards the maturity of the US crypto regulatory system. It not only provides an administrative "safe haven" but also profoundly influences the geographical flow of global digital asset innovation in the coming years, marking 2026 as the first year of "compliant innovation." With the unprecedented legal certainty granted by the Innovation Exemption and the CLARITY Act, the US crypto industry will attract substantial institutional funding, accelerating the transformation of crypto assets from the fringes of traditional finance to a "structured asset class." For industry participants eager to capitalize on this policy dividend, a clear strategic focus is essential: startups should view the exemption period (12 to 24 months) as a low-cost, rapid window into the US market, but must consider "full decentralization" as the ultimate goal of their operations. This means teams must design a clear decentralized roadmap based on "control," rather than relying on vague "continuous effort" standards. Projects that fail to achieve verifiable decentralization on time will face high retroactive compliance risks. Furthermore, given the ongoing controversy surrounding the KYC/AML requirements for DeFi protocols included in the exemption policy, projects unable to achieve full technical decentralization and unwilling to adopt compliance standards such as ERC-3643 may need to consider abandoning the US retail market after the exemption period. Despite breakthroughs in the US at the executive and legislative levels, the challenge of fragmented global regulation remains significant. The divergence between the flexible US model and the strict, pre-authorization model of the EU's MiCA will continue to lead to "regulatory arbitrage" by companies globally. To create a level playing field and ensure consumer protection is not affected by geography, international coordination is urgently needed for the future development of the industry. In the long term, a possible prediction is that by 2030, major jurisdictions may tend to adopt a common underlying framework, 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 US regulatory system's shift from "vague suppression" to "clear regulation." It attempts to compensate for legislative lags with administrative flexibility, providing a transitional path for digital assets to remain vibrant while moving towards compliance. For the crypto industry, the opening of this door of exploration signifies the end of the era of unchecked growth; "compliant innovation" will become the core competitive advantage for navigating economic cycles. 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 corporate success lies in whether, while enjoying the speed advantage brought by exemptions, companies can steadfastly move towards verifiable decentralization and robust compliance, thereby transforming regulatory complexity into a competitive advantage in the global market.