Wall Street Giant 'Forces' SEC Showdown, Crypto Exemption Setback in January

Original Article Title: "Crypto Exemption Effective in January Falls Through! SEC Urgently Hits the 'Brakes,' Wall Street in Uproar"

Original Article Author: Nancy, PANews

Real-world asset (RWA) tokenization is triggering a global wave of on-chain activities. The inflow of funds and asset abundance have transformed this on-chain movement from a crypto-native experimental ground into a new battleground fiercely contested by Wall Street.

While the RWA track is rapidly advancing, Traditional Finance (TradFi) and Crypto are at odds. On one side, Wall Street is more concerned with regulatory arbitrage and systemic risk, emphasizing stability and order; on the other hand, the crypto industry pursues innovation speed and decentralization, fearing that existing frameworks will stifle development.

However, months ago, the SEC announced plans to introduce a comprehensive crypto innovation exemption mechanism, set to take effect in January of this year. But this pro-crypto aggressive policy met fierce opposition from Wall Street, and due to the legislative pace of the crypto market structure bill, the originally promised effective date will be postponed.

Blocked by Wall Street, Crypto Exemption Could Face Delay

This week, JPMorgan Chase, Citadel, and SIFMA (Securities Industry and Financial Markets Association) held a closed-door meeting with the SEC's crypto working group. During the meeting, these Wall Street representatives explicitly opposed providing broad regulatory exemptions for tokenized securities and advocated for applying the existing federal securities law framework.

The crypto exemption mechanism is the SEC's "green channel" tailored for tokenized securities, DeFi, and other crypto products, aiming to allow these projects to temporarily bypass cumbersome full securities registration and quickly launch innovative products under certain investor protection conditions.

However, regarding the SEC's attempt to greenlight tokenized assets through regulatory shortcuts, these financial institutions issued stern warnings, believing that such actions could harm the overall U.S. economy. They recommended regulatory agencies to conduct rigorous intrusive oversight rather than simply granting exemptions. Even if there are any exemptions for innovation, they must be narrow, based on rigorous economic analysis, with strict guardrails, and must not replace comprehensive rule-making.

They further emphasized that regulatory treatment should be based on economic features, not the technology or category label used (such as DeFi), and advocated for the regulatory principle of "same business, same rules." They strongly opposed establishing dual regulatory standards, arguing that any broad exemptions attempting to circumvent long-term investor protection frameworks would not only weaken investor protection but also lead to market confusion and fragmentation.

The meeting also specifically mentioned the flash crash in October 2025 and the collapse of Stream Finance as cautionary tales, emphasizing that if tokenized securities are allowed to operate outside the existing securities law protection, the U.S. financial market will face significant systemic risks.

Meanwhile, in response to the SEC's plan to exempt some DeFi projects from compliance obligations, Wall Street has also expressed concern. SIFMA pointed out that many so-called DeFi protocols actually perform core functions of brokers, trading platforms, or clearinghouses, yet operate in a regulatory gray area. The DeFi environment faces various unique technical risks, including the extractable value (MEV) resulting in sandwich attacks, pricing mechanism flaws of Automated Market Makers (AMMs), and opaque conflicts of interest. However, DeFi was not the sole focus of this meeting; according to Decrypt, key DeFi advocates were unaware of this meeting.

Furthermore, for wallet providers involved in tokenized asset activities, the meeting also emphasized that wallets performing core brokerage functions and earning transaction fee-based revenue must register as broker-dealers and differentiate between non-custodial and custodial wallet models.

Ultimately, Wall Street's stance is clear: embracing innovation does not mean starting from scratch. Rather than establishing a parallel independent regulatory system, it is better to confine tokenized assets within the existing mature compliance framework.

The highly anticipated crypto exemption mechanism has faced uncertainties. SEC Chairman Paul Atkins has withdrawn the previously scheduled timeline for the crypto exemption policy to be released this month. During a recent joint meeting with the CFTC, Atkins noted that the uncertainty in advancing the crypto market structure bill could directly impact the timeline for the exemption mechanism to take effect, requiring careful consideration before making a decision. When asked about a specific timeline, he declined to commit to publishing final rules this month or even next month.

Fully Embracing Securities Law Regulation, Tokenized Products Classified into Two Categories

In addition to regulatory issues, the legal status and regulatory applicability of tokenized securities have not yet been clarified. Therefore, Paul Atkins announced plans in November last year to establish a token taxonomy system based on the Howey test to clarify which crypto assets constitute securities and to define a clear regulatory framework for crypto asset regulation.

On January 28, the SEC officially released the security token guidance, aiming to align with the market structure bill being pushed by U.S. legislators and provide a clearer regulatory path for market participants to conduct related business within a compliance framework.

The document clearly states that whether a security is regulated depends on its legal attributes and economic substance, rather than whether it is in tokenized form; tokenization itself does not change the scope of securities law. In other words, merely putting an asset on the chain or tokenizing it does not change the applicability of federal securities laws.

According to the SEC definition, a security token is presented in the form of a crypto asset, and ownership records are entirely or partially maintained through a cryptographic network.

The document categorizes the tokenized securities model on the market into two core categories: issuer-sponsored and third-party-sponsored, and clarifies the regulatory requirements for each.

The first category is the direct issuer tokenization model: where the issuer (or its agent) directly issues and records holder information using blockchain technology, whether on-chain or off-chain. Such tokenized securities must comply with the same legal obligations as traditional securities, such as registration and disclosure requirements;

The second category is the third-party tokenization model: divided into custodial, where token holders indirectly own custodied securities through the token; synthetic, where only the performance of the underlying security's price is tracked without transferring any substantive ownership or voting rights, and such products may constitute security-based swaps.

The document highlights the potential risks of third-party tokenization products, pointing out that this model may introduce additional counterparty and insolvency risks, and some products may be subject to stricter security-based swap regulatory rules.

The SEC also stated that the "door is wide open" and is ready to actively engage with market participants on specific compliance pathways to assist businesses in conducting innovative activities within the framework of federal securities laws.

As the SEC further refines its supervision of RWAs, it will significantly reduce regulatory arbitrage risks and pave the way for more traditional institutions to enter the space.

Original Article Link