During Gary Gensler's era, the SEC used the "Ové Test" as a weapon, launching numerous enforcement actions against the crypto industry and issuing hefty fines, plunging the entire market into a "regulatory winter." However, with the arrival of new Chairman Paul Atkins, a quiet but profound regulatory revolution is underway: lawsuits are being withdrawn, dialogue is being initiated, and the "innovation exemption" framework is emerging.

The SEC is seeking a balance between investor protection and embracing technological innovation. This shift not only represents a shift in regulatory philosophy but also could become a key catalyst for unleashing institutional capital and accelerating the approval of spot ETFs.

From “tough enforcement” to “innovation exemption”: a historic shift in regulatory strategy

Under the leadership of former Chairman Gary Gensler, known for his tough stance, the SEC was renowned for its rigid and "strict enforcement" regulatory approach. A notable feature of this era was the frequent application of the "Howey Test" to classify crypto assets as securities. Since taking office in 2021, Gensler has initiated over 2,700 enforcement actions, resulting in fines exceeding $21 billion, and has publicly stated that the crypto industry is "rife with fraud and abuse."

The regulatory enforcement approach has created a high degree of uncertainty within the industry. Major lawsuits against giants like Coinbase and Ripple clearly demonstrate the market's volatility. In the Ripple case in particular, the SEC applied the Howey test, dating back to 1946, as a legal standard for regulating crypto assets. Furthermore, the court ruled that different sales methods for XRP also affect its security status. This has led to widespread anxiety among crypto institutions, and many crypto products, from airdrops to user experiences, have "barred" US users.

However, the SEC's intensive enforcement strategy has not only been ineffective but has also caused lasting damage to the market. A regulatory approach lacking clear guidance makes every enforcement action full of surprises, leading to systemic risks and an unpredictable market environment, and becoming a barrier to entry for new capital and new players. Interestingly, the previous SEC's repeated emphasis on "investor protection" ironically created a more volatile and fragile market, ultimately defeating the SEC's original purpose.

New Chairman Paul Atkins's arrival has seen a 360-degree shift in regulatory direction. He first dropped several lawsuits against crypto entities, including Coinbase and Binance, established a dedicated crypto working group, and launched "Project Crypto," a major shift in the SEC's regulatory approach. Compared to Gary Gensler, Paul Atkins advocated for a more collaborative approach, prioritizing the development of formal rules.

The SEC is transforming from an old-school law enforcer to a coordinator that actively listens to industry opinions. Its actions of withdrawing lawsuits and inviting industry dialogues also send a signal of ending confrontation, which will help rebuild market trust and encourage local technological innovation.

A complete analysis of the “Innovation Exemption” regulatory framework

The core of the "Innovation Exemption" proposal is not comprehensive regulatory deregulation, but rather a targeted and conditional exemption aimed at reducing overly burdensome regulatory burdens. The proposal would grant crypto institutions "conditional exemptions," allowing them to offer new products and services without immediately facing overly burdensome or incompatible mandatory regulations. This framework would apply to both registered and unregistered entities, providing a structured and traceable path for innovation.

The new framework recognizes that securities rules applied in traditional markets are not suitable for the rapidly developing crypto market. Therefore, the SEC is shifting to a more thoughtful, risk-based regulatory approach. "Conditional exemptions" mean that compliance requirements will be implemented in phases, tied to the maturity and risk profile of the project. This is effectively a more complex regulatory model than the Howey test.

It is worth noting that the "Innovation Exemption" proposal may promote the vigorous development of three key areas in the crypto industry, thereby reducing legal uncertainty for start-ups. 1) It will provide a "safe harbor" for DeFi platforms and developers, while focusing on the disclosure of standardized smart contracts; 2) It will promote the growth of "super application" entities, allowing them to trade multiple asset classes including traditional securities and cryptocurrencies under a single license; 3) It will support entities building a tokenized securities ecosystem and explore regulatory sandboxes for token issuance.

The SEC also emphasized that the key eligibility criteria for a platform to obtain an "innovation exemption" is that it must demonstrate "true decentralization" to prevent regulatory arbitrage by centralized entities.

Market Impact Outlook: Regulatory Breakthrough, Institutional Funding, and Spot ETFs

On September 2, 2025, the SEC and CFTC issued a "landmark" joint statement clarifying that registered exchanges will be allowed to list and trade certain spot crypto products.

The long-standing conflict between the SEC and CFTC over crypto asset jurisdiction has created a legal minefield for the industry. This joint statement is the first step toward resolving this conflict and confirms that the two regulators are coordinating their approaches to foster innovation, enhance transparency, and strengthen investor protection. This synergy will provide exchanges and market participants with a more predictable and stable environment.

In addition, the two institutions announced that they will jointly hold a regulatory coordination roundtable on September 29, which also indicates that the regulatory authorities will continue to move in the same direction.

Regulatory clarity is also key to attracting institutional participation. Once the ambiguity surrounding spot trading on regulated exchanges is removed, it will open the door for institutional funds to flow into the crypto market.

The influx of institutional capital will fundamentally change market behavior and structure. Historically, the crypto market has been dominated by retail speculation and offshore platforms. The entry of major exchanges like Nasdaq, NYSE, and CME, along with the resulting influx of institutional capital, will increase market liquidity, reduce volatility, and make crypto assets a more reliable asset class for a broad investor base.

The improving regulatory environment will also accelerate the approval process for spot crypto ETFs. Currently, nearly 100% of spot crypto ETF applications are awaiting SEC approval. These products will allow investors to gain exposure to crypto assets through traditional brokerage accounts and help integrate them into the mainstream financial system.

The approval of spot ETFs is a key step in integrating crypto assets into the traditional financial system. It is not just about emerging investment products, but also represents a fundamental shift in the way crypto assets are accessed. It legitimizes cryptocurrencies as a recognized asset class, making them accessible to millions of new investors and will promote more widespread institutional adoption and financial product innovation.