How SEC's Innovation Exemption Reshapes the Competition Rules for Digital Assets: From Policy Design to Market Opportunities

Preface: The New Era of Compliance in 2026

The US cryptocurrency market is facing an unprecedented turning point. SEC Chair Paul Atkins launched the “Crypto Project” in July 2025, marking a shift from passive enforcement to proactive guidance by US regulators. Among the most notable measures—the Innovation Exemption Policy—will officially take effect in January 2026, signaling that the industry will enter a new phase of “compliance innovation.”

The core intent of this policy is to create a time-limited “experimental zone” for digital asset companies, allowing new technologies and products to quickly enter the market under a simplified compliance framework without bearing the full costs of securities registration procedures. This shift will not only impact the US domestic market but also reshape the global regulatory landscape for digital assets.

Practical Operation Logic of the Innovation Exemption: A 12-24 Month Window Mechanism

Who can apply? An unexpectedly broad coverage

The Innovation Exemption is not designed for specific asset classes. Trading platforms, DeFi protocols, stablecoin issuers, and even DAOs are within the scope of applications. This means all participants—from infrastructure to application layers—have the opportunity to obtain this “temporary license.”

The link between exemption period and “incubation goals”

The exemption period is typically set between 12 and 24 months. This is not an arbitrary timeframe but is linked to the project’s goals of “full decentralization” or “functional completeness.” In other words, the SEC provides a clear timetable: key technological and governance milestones should be achieved within this window.

Simplified disclosures vs. full registration: more than just cost reduction

During the exemption period, companies only need to submit simplified disclosures, avoiding the lengthy procedures of traditional S-1 registration forms. This “lightweight compliance framework” is similar to the “entry pathway” mechanism envisioned in the CLARITY Act discussed in Congress—startups can raise up to $75 million in a single fiscal year from the public without following the SEC’s full registration rules.

What does this mean for startups? Previously, legal costs could reach millions of dollars and take over a year; now, these are compressed into more manageable costs and timelines.

Principles-based compliance standards

The exemption is not an “rule-free zone.” Atkins emphasizes that this policy is based on principles rather than rigid provisions. Companies protected by the exemption still need to meet minimum compliance standards:

Periodic reporting and review: Companies must submit quarterly operational reports and undergo regular SEC reviews. This ensures ongoing supervision rather than one-time approval.

Investor protection measures: Projects targeting retail investors must include risk disclosures and investment limits.

Technical standards: May include adopting verified participant whitelists or compliant token standards like ERC-3643. The significance of ERC-3643 lies in embedding identity verification and transfer restrictions into smart contracts—posing a challenge for DeFi projects that aim to remain fully decentralized.

Token Classification Framework and Decentralization Testing

The true power of the Innovation Exemption lies in its combination with the SEC’s new token classification system. This system uses the Howey test principles to determine which digital assets are securities.

Four-tier classification system

The SEC divides digital assets into four categories: Commodity/Network Tokens (e.g., Bitcoin), Utility Tokens, Collectibles (NFTs), and Tokenized Securities.

For the first three categories, if they meet the standards of “full decentralization” or “functional completeness,” they can escape securities regulation. Once an investment contract is deemed “complete,” even if the token was initially issued as a security, subsequent trading will not automatically be considered a “security transaction.”

Clear path for “regulatory exit”

This mechanism provides unprecedented clarity for projects: SEC staff are instructed to explicitly specify when digital assets constitute securities, while emphasizing that most crypto assets are not securities in essence. Even if some assets have security features, regulators should promote rather than hinder their development.

Congressional Legislation and SEC Policy Triangulation

The Innovation Exemption is not an isolated administrative measure but forms a “triangular support structure” with two key pieces of congressional legislation.

CLARITY Act: Ending jurisdictional ambiguity

Long-standing ambiguity existed between the SEC and the Commodity Futures Trading Commission (CFTC) over jurisdiction of crypto assets. The CLARITY Act addresses this by clarifying division of responsibilities:

• Primary market (token issuance and fundraising) managed by SEC
• Secondary market (spot commodity trading) managed by CFTC

The CLARITY Act also introduces a “mature blockchain” test to assess whether a project has achieved sufficient decentralization. Standards include token distribution, broad governance participation, and independence from any controlling party.

The Innovation Exemption acts as a “transitional manager” here: it provides a “buffer zone” for projects progressing toward full decentralization. Companies can raise funds and test products under a simplified disclosure framework while evolving toward complete decentralization.

GENIUS Act: The “way out” for stablecoins

Signed into law in July 2025, the GENIUS Act is the first comprehensive federal regulation of digital assets in the US. It explicitly states:

Clarification of stablecoin status: Payment stablecoins are excluded from the definitions of “securities” and “commodities,” falling under the regulatory framework of banking agencies (e.g., OCC).

Issuance requirements: Approved stablecoin issuers must maintain 1:1 reserves, limited to highly liquid assets (USD, Treasuries, etc.), and are prohibited from paying interest or yields.

Significance of regulatory segmentation: With the GENIUS Act clearly defining stablecoin status and requirements, SEC’s Innovation Exemption can focus on innovative areas like DeFi protocols and new network tokens, avoiding overlaps with other regulators in the stablecoin space.

Joint governance of SEC and CFTC

The two major regulators have committed to strengthening coordination through joint statements and roundtable discussions. A joint statement clarifies that platforms registered with both SEC and CFTC can facilitate certain crypto spot products trading, reflecting a regulatory desire for market participants to choose trading venues freely.

Joint discussions on the Innovation Exemption and DeFi regulation have become key topics in these roundtables, crucial for reducing compliance gaps among market participants.

Decentralization vs. Compliance: Deep Concerns of the DeFi Community

Significant opportunities for startups and compliant operators

For startups and existing platforms seeking legal operation in the US, the opportunities brought by the Innovation Exemption are tangible:

Sharp reduction in entry costs: Previously, complying with US regulations could cost millions of dollars and take over a year. The exemption simplifies disclosures and provides a clear transition path, significantly lowering these barriers.

Return of institutional capital: Years of regulatory uncertainty led many projects to seek geographic arbitrage—setting up overseas to avoid US regulation. With a clearer policy framework, these projects will reassess the feasibility of entering the US market. Certainty is critical for attracting institutional investors and venture capital, who need a predictable legal environment.

Acceleration of product innovation: The exemption period offers innovators space to rapidly test various concepts, especially in emerging DeFi and Web3 ecosystems. Companies like ConsenSys can iterate decentralized applications in a relatively relaxed regulatory environment.

Opening the door for traditional financial institutions: Giants like JPMorgan and Morgan Stanley have been actively embracing digital assets. The SEC’s removal of SAB 121 accounting standards—previously requiring custodians to list crypto assets on balance sheets—eliminates a key obstacle for banks and trust companies to offer large-scale digital asset custody services. Coupled with the administrative flexibility of the Innovation Exemption, these institutions can now enter the crypto space at lower regulatory costs and with clearer legal pathways.

Core concerns of the DeFi community: erosion of decentralization principles

However, the Innovation Exemption also sparks significant industry debate, especially regarding its impact on decentralization:

Mandatory KYC/AML realities: New rules require all projects using the exemption to implement “reasonable user verification,” meaning DeFi protocols must deploy KYC/AML processes. This directly challenges the philosophical foundation of DeFi.

Protocol centralization risks: To comply, DeFi protocols may be forced to split liquidity pools into “authorized pools” and “public pools,” and adopt compliant token standards like ERC-3643. ERC-3643 embeds identity verification and transfer restrictions into smart contracts—once every transaction checks a whitelist and tokens can be frozen by a central entity, the question arises: is this still DeFi?

Industry leaders’ candid remarks: Founders of Uniswap and others have publicly stated that regulating software developers as financial intermediaries will harm US competitiveness and stifle innovation. They argue this approach misinterprets the nature of decentralized protocols.

Defensive responses from traditional finance

Traditional financial sectors also oppose the Innovation Exemption, but for the opposite reason—they worry about “regulatory arbitrage”:

Same assets, double standards: The World Federation of Exchanges (WFE) and Citadel Securities have pressured the SEC to abandon the exemption plan, claiming that broad exemptions for tokenized securities would create two regulatory regimes for the same assets.

Maintaining traditional protections: SIFMA emphasizes that tokenized securities must adhere to core investor protection rules of traditional financial assets. They believe regulatory relaxation could increase market risks and fraud.

Global Regulatory “Going in Opposite Directions”: US vs. Europe

The US Innovation Exemption policy and Europe’s MiCA framework represent two extremes in digital asset regulation—and two possible future directions globally.

Ideological opposition: Tolerance for innovation vs. structured guarantees

The US approach embodies a philosophy of “allowing initial uncertainty in exchange for faster and more flexible innovation.” This path is especially attractive to fintech and SMEs.

Europe’s MiCA adopts a “pre-authorization and unified rules” approach, providing structured certainty and consistent consumer protection across Europe. For large institutions like JPMorgan, a unified rule system offers scale advantages.

The “dual compliance” reality for enterprises

This divergence forces global companies to adopt “market-specific compliance” strategies, managing different classification and operational requirements for the same product (e.g., USD-backed stablecoins). This increases complexity and costs for international expansion.

Roadmap for Market Participants and Key Decisions in 2026

Startups: Seize the window, but avoid short-term thinking

The 12-24 month exemption period should be viewed as a “low-cost launch window” into the US market, but project teams must see “full decentralization” as a fundamental goal, not just a compliance hurdle.

Core advice: Develop a decentralization roadmap based on “control transfer” rather than relying on vague “ongoing efforts” standards. Projects unable to achieve verifiable decentralization within the timeframe face high post-compliance risks.

DeFi project trade-offs

Given the exemption’s requirement for deploying KYC/AML in DeFi protocols, projects that cannot fully decentralize technically or are unwilling to adopt standards like ERC-3643 need to carefully evaluate whether to continue serving the US retail market after the exemption period.

Opportunities for traditional financial institutions

The combination of the Innovation Exemption and the abolition of SAB 121 provides an unprecedented “fast track” for traditional finance. These institutions can now enter the digital asset space with relatively low regulatory capital costs and clearer legal pathways.

Long-term Outlook: Evolution from “Vague Enforcement” to “Explicit Innovation”

The Innovation Exemption marks a shift in US regulation from “abstract sanctions” to “proactive rulemaking.” It is not just administrative easing but an acknowledgment of the transition of digital assets from “financial fringe” to “structured asset class.”

The collaboration between Congress passing the CLARITY Act and GENIUS Act, and the SEC’s implementation of the Innovation Exemption, signals that the US has moved from “We don’t know how to handle crypto assets” to “We see digital assets as an emerging financial system requiring tailored regulation.”

The ultimate trend in global compliance

Despite progress in US regulation and legislation, the challenge of global regulatory fragmentation remains significant. The US’s flexible model and Europe’s strict MiCA authorization system will continue to stimulate “regulatory arbitrage” worldwide.

Reasonable forecast for 2030: Major jurisdictions are likely to converge toward a common framework, including unified AML/KYC standards and stablecoin reserve requirements, fostering cross-border interoperability and institutional-level global adoption.

A new definition of competitiveness

The Innovation Exemption represents a historic turning point in US regulation—from “vague suppression” to “transparent guidance.” It attempts to bridge legislative lag through administrative flexibility, providing a pathway for digital assets to “remain vibrant while achieving compliance.”

For the crypto industry, this signals the end of the era of unregulated growth. “Compliance innovation” will become the core capability to navigate market cycles over the next decade.

Success will no longer depend solely on code but on a deep understanding of asset classification and a solid regulatory foundation. The key to enterprise competitiveness lies in leveraging the speed advantage of the exemption period while progressing toward verifiable decentralization and robust compliance, transforming regulatory complexity into a competitive advantage in the global market.

This is a milestone in digital asset maturity: evolving from “code is law” to “code and compliance dancing together.”