The End of the Bureaucratic Era: From Law Enforcement to Encouraging Innovation
In the past few years, the attitude of US regulators towards crypto assets has been like a roller coaster.
Former SEC Chairman Gary Gensler was known for his "regulation is law enforcement" approach. He relied on the 1946 Howey test to classify any token used for fundraising as a security and filed lawsuits against projects like Ripple. For example, in 2023, a court ruled that XRP was a security in institutional sales but not in the retail market. Even Coinbase, which had already gone public through an SEC S-1 filing, was sued for "operating an unregistered securities exchange." Such contradictions created a climate of fear in the market, known as the "SEC effect": whenever a token was designated as a security, its price often plummeted, and capital and developers fled to more regulatory-friendly Europe and Asia.
Following the change of government in the United States in 2025, a major shift in policy direction occurred. New SEC Chairman Paul Atkins, in an interview with CNBC, stated that most crypto assets should not be classified as securities and proposed three major reforms: **token taxonomy**, **crypto projects**, and **innovation exemptions**. He said most crypto assets resemble commodities, collectibles, or instrumental tokens, and only a small fraction of investment contracts that meet the Howey test are true securities. With the new administration dropping several lawsuits and directing the SEC and CFTC to work together on rule development, the United States hopes to reclaim its position as a global center for crypto innovation. Regarding innovation exemptions, Atkins pledged to launch an "innovation exemption" sandbox in January 2026. This sandbox envisions allowing projects to quickly test their products within a limited timeframe without cumbersome registration, but they must publish operational reports, comply with KYC/AML rules, and implement investor protection measures. Public opinion believes this policy will provide breathing room for blockchain startups and reduce compliance costs. However, allowing issuers to screen user identities has been criticized by some decentralized communities as "violating the principle of openness," and some DAOs worry that liquidity pools will be divided into permissioned and permissionless systems. A Wake-Up Call: The FTX Collapse and Regulatory Shift The shift in regulatory direction cannot be separated from past lessons. In November 2022, one of the world's largest cryptocurrency exchanges, FTX, collapsed within days, its once-valued empire of $32 billion filing for bankruptcy. Founder Sam Bankman-Fried was subsequently arrested and faces multiple criminal charges. The media described this event as the "crypto Lehman moment," with millions of users' assets vanishing. Subsequently, European and American regulators realized that unregulated exchanges could easily become incubators for Ponzi schemes. Reports indicate that each major crisis drives the emergence of new risk management standards, and society begins to demand a stricter regulatory framework. The FTX case prompted the US government to launch the Crypto Sprint, requiring the SEC and CFTC to provide specific guidance applicable to crypto assets. Simultaneously, Congress passed the GENIUS Act, recognizing compliant stablecoins as legitimate payment instruments for the first time. The US Treasury Department revoked SAB 121, which prohibited banks from holding crypto assets, allowing banks like Goldman Sachs and Citigroup to hold their clients' Bitcoin and Ethereum. These measures signify that the authorities are no longer simply suppressing the market, but rather redesigning risk control systems after learning from past lessons. The "Cat and Mouse Game" of Regulation and Innovation: Case Studies Tighter regulation does not mean industry stagnation; on the contrary, some companies are proactively embracing compliance and turning it into a competitive advantage. Take Coinbase as an example. After being sued by the SEC, Coinbase developed efficient KYC/anti-money laundering technology and sold these tools as a "compliance-as-a-service" to other institutions. Its report shows that by providing technical support to external companies, Coinbase's compliance business revenue increased by over 215%. This case demonstrates that even in a stringent regulatory environment, companies can still seek commercial value through innovative solutions. Venture capital giant Andreessen Horowitz (a16z) also chose a "preemptive" approach, hiring former CFTC Chairman Heath Tarbert as chief legal officer to actively participate in policy-making and lobby regulators to provide a more lenient regulatory environment for technologies such as zero-knowledge proofs. This "revolving door" strategy not only gains a voice for its own investment projects but also reflects the power struggle between regulators and industry. Another interesting example comes from Tesla. Because US labor law prohibits companies from paying wages directly in cryptocurrency, Musk's team exploited a loophole in an old California law that allowed for "emergency advances," enabling employees to choose to receive a portion of their salary in the stablecoin USDC, which was then settled daily by a cryptocurrency exchange. This clever operation illustrates that innovative compensation schemes can be explored within a regulatory framework, catering to employees' interest in digital assets. Global Perspective: The Regulatory Race in Europe, Asia, and Emerging Markets The US policy shift is not an isolated event. In Europe, the Crypto Asset Markets Directive (MiCA) came into effect in 2024, providing unified rules across the EU. The European Securities and Markets Authority (ESMA) stated that companies offering crypto services before December 30, 2024, can continue operating during the transition period, but member states can shorten the transition period themselves to protect investors. MiCA requires digital asset service providers to disclose transaction records, order books, and transparency data in a standardized format, and to submit white paper information to ensure market order. Due to varying transition periods across countries, scholars worry that regulatory arbitrage could lead to a "regulatory jigsaw puzzle." Countries like Germany, in an effort to seize market share, have shortened transition periods to attract more companies to apply for local licenses. This differentiated implementation has prompted the EU to consider a unified regulatory platform under ESMA to avoid fragmentation impacting competitiveness. The UK, on the other hand, has adopted the Financial Services and Markets Act (FSMA) to establish multi-tiered regulation. Its regulatory sandbox allows startups to test innovative products in a controlled environment, from which regulators gather data and adjust policies. In Asia, Singapore and Hong Kong have opened regulatory sandbox programs since 2020, issuing licenses to virtual asset trading platforms to attract exchanges. The Monetary Authority of Singapore approved a blockchain-based money market fund launched by InvestaX and Franklin Templeton, allowing retail investors to purchase tokenized short-term bonds and commercial paper. The fund's shares are recorded on the blockchain, providing real-time transparency and daily liquidity. This example shows that Asian regulators prefer a "trial and error" approach, assessing risks and returns based on practical experience. In developing markets, the Pakistani government also signed a memorandum of understanding with Binance to pilot the tokenization of $2 billion worth of sovereign debt and commodities. Located on the edge of Western sanctions, Pakistan is using tokenization to improve liquidity and attract overseas capital, demonstrating emerging economies' strategy of breaking through traditional restrictions through financial innovation. While the US and EU are still discussing regulatory frameworks, emerging markets have quickly embraced blockchain financing tools; this "leapfrog development" is noteworthy. Looking ahead: In an era of regulatory race, where will capital and innovation flow? Looking back, the US SEC's "innovation exemption" is more like a signpost for a global shift in crypto policy: from hardline enforcement to categorized regulation, temporary exemptions, and sandbox trials. Policymakers are beginning to realize that simply blocking access will only accelerate the brain drain and the expansion of gray areas; a more feasible approach is to draw a workable line between investor protection and the pace of innovation. The game is far from over. The continued entry of traditional financial institutions has broadened the application scenarios for blockchain and brought about a new balance of power: traditional giants such as the Chicago Mercantile Exchange and the New York Stock Exchange have successively launched related products; the World Federation of Exchanges is concerned that deregulation will weaken market integrity and advocates applying the same set of rules to traditional exchanges and DeFi platforms; while institutions such as Citadel Securities are demanding stronger constraints on decentralized protocols, the founder of Uniswap argues that excessive regulation will stifle open-source innovation. The very disagreements are a testament to the complexity of the new paradigm. For the average reader, understanding "innovation exemptions" doesn't require delving into obscure clauses. Think of it as a testing ground designated by the government, allowing seed projects to test new varieties within a limited timeframe, and then apply for formal access once they mature. Regulators are willing to provide flexibility, but they will also erect barriers—projects must continuously disclose operational progress and risks. As the detailed rules are implemented, the US may see a return of projects, and it may also prompt Europe and Asia to accelerate the introduction of benchmarking mechanisms, thereby fostering more universal regulatory templates and leading the crypto ecosystem towards a more standardized and inclusive stage. For trading platforms, the opportunities brought about by the regulatory race often lie in two areas: "compliance implementation + improved user experience and reduced friction."
Hui Xin
Joy
Brian
Davin