The allocation of regulatory power within the SEC: from uncertainty to "compliant innovation"

From Ambiguous Repression to Structured Regulatory Framework

2025 marks a historic turning point in the relationship between American regulatory authorities and the crypto sector. For over a decade, the Securities and Exchange Commission (SEC) operated under a reactive model—“enforcement as regulation”—creating legal uncertainty that stalled innovation within the United States. In July 2025, new President Paul Atkins launched the “Crypto Project,” signaling a paradigm shift: from a punitive approach to a proactive model aimed at positioning the United States as a global hub of innovation in digital assets.

The core of this transformation is the Innovation Exemption, conceived not as a permanent concession but as a temporary administrative corridor. Atkins confirmed that the regulation will officially come into effect in January 2026. This choice represents a strategic recalibration of regulatory powers: no more retroactive sanctions, but explicit frameworks guiding projects toward compliance.

The Structure of the Innovation Exemption: Mechanisms and Operational Limits

Scope and Duration of the Exemption

The Innovation Exemption opens the door to any entity operating in the crypto segment—exchanges, DeFi protocols, stablecoin issuers, even DAOs—granting a “temporary refuge” from full registration requirements under traditional securities law.

The granted period ranges from 12 to 24 months, representing a “regulatory incubation” window during which projects can raise capital and develop their networks with simplified disclosures, without adhering to the complex S-1 forms historically required by the SEC. This administrative design echoes the “on-ramp” proposed by the CLARITY Act discussed in Congress, which allows startups to raise up to 75 million dollars annually from the public, provided they meet reduced informational standards.

Principles-Based Compliance, Not Rigid Rules

Atkins emphasized that the exemption will be structured around flexible principles, not monolithic regulations. Beneficiary companies must still adhere to minimum standards: quarterly operational reports, periodic SEC reviews, risk notices for retail investors, investment limits. Some projects may need to comply with specific technical standards such as ERC-3643, a smart contract incorporating identity verification and transfer restrictions.

The Decentralization Test and the “Control Allocation”

The Innovation Exemption relies on a new classification system for tokens. The SEC distinguishes four categories: commodity/network token (like Bitcoin), utility tokens, collectibles (NFT), and security tokens that are tokenized. The decisive criterion is achieving “sufficient decentralization” according to the Howey test.

The crucial mechanism is this: once an asset meets the criteria for decentralization or functional completeness, it can “exit” the securities perimeter. Even if initially issued as a security, subsequent transactions will not automatically be considered securities trading. This dynamic control allocation offers projects an explicit regulatory pathway—from centralized control phases toward functional autonomy.

The Legislative Context: Three Coordinated Pillars

The Innovation Exemption is not an isolated administrative action. It integrates with two congressional legislations: CLARITY Act and GENIUS Act, forming the American regulatory architecture of the next era.

CLARITY Act: Resolving the SEC-CFTC Jurisdiction Conflict

The CLARITY Act addresses the historic jurisdictional conflict. It assigns the SEC the regulation of primary issuance and fundraising; the CFTC oversees spot trading of digital commodities. It introduces the “mature blockchain” test—objective criteria to determine when a project has achieved sufficient decentralization.

The Innovation Exemption acts as a bridge: providing projects with an administrative transition toward “legislative maturity.” As they reach decentralization, they can operate under the temporary exemption umbrella; upon reaching the milestone, they transition to permanent oversight by the CFTC.

GENIUS Act: Regulatory Isolation of Stablecoins

Signed into law in July 2025, the GENIUS Act represents the first comprehensive federal regulation of digital assets in the USA. Its key innovation: it excludes payment stablecoins from the federal definitions of “security” or “commodity,” placing them under banking supervision (OCC). It mandates 1:1 reserves in highly liquid assets (only dollars or treasuries), prohibiting yields.

Since the GENIUS Act has already defined the regulatory perimeter for stablecoins, the SEC’s Innovation Exemption will focus on innovations beyond stablecoins: DeFi protocols, network tokens, derivatives—avoiding regulatory overlaps.

Inter-Agency Coordination: SEC and CFTC

SEC and CFTC have announced joint statements to align supervision. A joint note clarifies that registered platforms can facilitate spot trading of certain crypto assets. Dedicated roundtables address coordination on the Innovation Exemption and DeFi—crucial for reducing compliance gaps among market operators.

Market Opportunities: Attractions for Innovators and Institutions

The Innovation Exemption creates two beneficiary categories, with divergent entry strategies.

For compliant startups and operators

Lowering entry barriers: Historically, a crypto project wishing to operate legally in the US had to invest millions in legal consulting and over a year of time. The exemption drastically reduces these initial compliance costs.

Attracting institutional capital: A clear regulatory framework attracts venture capital and institutional investors, transforming previous uncertainty into confidence. Projects that had “migrated” can now reassess the US market.

Product experimentation: The exemption period allows rapid testing of new DeFi models, Web3 applications, yield farming structures—sectors that will thrive in the new permissive environment.

For large financial institutions

JPMorgan, Morgan Stanley, and other traditional finance players are accelerating their entry into digital assets. The SEC has abolished SAB 121, an accounting standard requiring custodians to record clients’ crypto assets as liabilities— a critical obstacle for banks and trust companies wanting to offer custody at scale.

Combined with the administrative flexibility of the Innovation Exemption, this removal enables large institutions to enter the crypto sector with reduced regulatory capital costs and transparent legal pathways.

Risks of “Institutionalization”: The DeFi Controversy

The Innovation Exemption has elicited polarized reactions within the sector.

The central issue: KYC/AML in smart contracts

New rules require beneficiary projects to implement “reasonable identity verification procedures.” For DeFi protocols, this means adopting KYC/AML—a paradox: DeFi is born from the opposite principle, i.e., the absence of verifying intermediaries.

A proposed solution is segmentation: “authorized pools” with verifications, “public pools” without. But this transforms the protocol into an intermediary, contradicting the core of decentralization. Industry leaders—founders of Uniswap—argue that regulating developers as financial intermediaries stifles American innovation and damages global competitiveness.

Adopting compliant standards like ERC-3643 exemplifies the miniature conflict: each transaction must check a whitelist; tokens can be frozen by a centralized entity. Is it still DeFi? The debate continues.

Opposition from Traditional Financial Institutions

Paradoxically, traditional finance has also expressed resistance. The World Federation of Exchanges and Citadel Securities wrote to the SEC warning of “regulatory arbitrage”: same asset, two separate regulatory regimes. The Securities Industry and Financial Markets Association (SIFMA) warns that loosening regulation on security tokenization would increase market risks and fraud, undermining investor protections.

Global Divergence: Flexible USA vs. Rigid Europe

The American Innovation Exemption and the CLARITY Act embody a philosophy: tolerate initial uncertainty and higher risk in exchange for faster innovation. It’s the “fail fast” model—the market’s invisible hand selecting viable projects.

Europe’s MiCA represents the opposite: structural predictability, prior authorization, uniform rules across the continent. It offers stability and peace of mind to large institutions but moves more slowly.

This divergence forces global companies to adopt “market-to-market” strategies: a stablecoin pegged to the dollar—an identical asset—must comply with radically different regimes between New York and Frankfurt. Control allocation varies: more initial freedom in the US with convergence toward standards; in Europe, strict standards from the start.

The consequence is “regulatory arbitrage”: activities concentrate where regulations are more favorable; the global framework fragments rather than converges.

Practical Strategies for Operators: The Path Toward Verifiable Compliance

For startups and growing projects

The exemption period (12-24 months) should be viewed as a low-cost window for entering the US market, not as a “permanent permit.” The strategic priority: design a decentralization roadmap based on verifiable control, not on vague “continuity of efforts.”

Projects that fail to achieve demonstrable decentralization by the end of the period will face high risks of retroactive compliance issues. Additionally, since the exemption requires KYC/AML in DeFi, protocols that cannot (or do not intend) fully decentralize or adopt standards like ERC-3643 will need to consider abandoning the US retail segment after the exemption.

For financial institutions

The removal of SAB 121 and the regulatory clarity provide a less burdensome entry point. Winning strategies will combine institutional custody with native crypto products, leveraging the administrative speed of the exemption to quickly position in the market.

Long-term Vision: Toward Global Convergence?

Despite progress in US administrative and legislative frameworks, global regulatory fragmentation remains significant. However, a plausible trend is that by 2030, major jurisdictions will converge toward a common minimum standard: uniform AML/KYC requirements, 1:1 reserve standards for stablecoins (like US dollars), and standardized asset categories.

This convergence would promote interoperability and institutional adoption worldwide, reducing compliance costs for multi-continental operators.

Conclusion: From Repression to “Compliant Innovation”

The Innovation Exemption marks the SEC’s shift from “ambiguous repression” to “explicit regulation.” It does not resolve all conflicts between decentralization and investor protection—these will persist—but it transforms uncertainty into clear pathways.

For the crypto sector, opening this administrative door ends the era of uncontrolled growth. Winning innovation will no longer depend solely on code but on clear allocation of regulatory powers and solid frameworks. The next generation of projects will succeed by quickly identifying the path toward verifiable decentralization, turning regulatory complexity into a competitive advantage on a global scale.

2026 will be the birth year of “compliant innovation”: not the kind that evades regulation, but the one that strategically integrates it, combining code with governance, speed with regulatory sustainability.