Crypto Exemptions Fail to Take Effect in January as SEC Slams the Brakes, Sparking Wall Street Uproar

Tokenized assets (RWA) are fueling a global wave of on-chain adoption. The surge of capital and asset diversity has quickly transformed this movement from a crypto-native testing ground into Wall Street’s latest arena.

While the RWA sector is advancing rapidly, TradFi (traditional finance) and crypto remain divided. Wall Street prioritizes regulatory arbitrage and systemic risk, emphasizing stability and order. In contrast, the crypto industry focuses on innovation speed and decentralization, wary that existing frameworks could stifle growth.

Several months ago, the SEC announced plans for a suite of crypto innovation exemptions, set to take effect in January. Yet this pro-crypto, aggressive approach met intense resistance from Wall Street, and the timeline has been delayed due to legislative developments around the crypto market structure bill.

Wall Street Pushback May Delay Crypto Exemptions

This week, JPMorgan, Citadel, and SIFMA (Securities Industry and Financial Markets Association) convened a closed-door meeting with the SEC’s crypto working group. Wall Street representatives firmly opposed broad regulatory exemptions for tokenized securities, advocating for the continued application of existing federal securities law frameworks.

The SEC’s crypto exemption mechanism serves as a “fast track” for tokenized securities and DeFi products, allowing these projects to quickly launch innovative offerings—provided they meet certain investor protection requirements—by temporarily bypassing full securities registration.

However, Wall Street institutions warned that regulatory shortcuts for tokenized assets could harm the US economy. They called for rigorous, transparent oversight instead of simple exemptions. Any innovation-focused exemptions must be narrowly defined, based on thorough economic analysis, and include robust safeguards—they must not replace comprehensive rulemaking.

They further emphasized that regulatory treatment should be determined by economic characteristics, not by technology or category labels such as DeFi. They supported the “same business, same rules” principle and strongly opposed dual regulatory standards, arguing that broad exemptions undermining longstanding investor protections would disrupt and fragment the market.

The meeting cited the October 2025 flash crash and the collapse of Stream Finance as cautionary tales, underscoring that excluding tokenized securities from current securities law protections would expose US financial markets to major systemic risks.

Wall Street also expressed concern over the SEC’s inclination to exempt certain DeFi projects from compliance obligations. SIFMA pointed out that many so-called DeFi protocols perform core broker, exchange, or clearing functions while operating outside regulatory oversight. DeFi environments present unique technical risks, including predatory trading from maximal extractable value (MEV), pricing flaws in automated market makers (AMMs), and opaque conflicts of interest. However, DeFi was not the sole focus of the meeting; according to Decrypt, key DeFi advocates were unaware of the event.

The meeting also highlighted that wallet providers involved in tokenized asset activities who perform core brokerage functions and earn transaction-based revenue must register as broker-dealers, with a clear distinction between custodial and non-custodial wallet models.

Ultimately, Wall Street’s stance is clear: embracing innovation doesn’t require building a new regulatory system. Rather than establishing parallel frameworks, it’s preferable to bring tokenized assets into the existing, mature compliance structure.

The much-anticipated crypto exemption mechanism now faces uncertainty. SEC Chairman Paul Atkins has withdrawn the scheduled rollout of the exemption policy for this month. In a recent joint meeting with the CFTC, Atkins noted that uncertainty around the crypto market structure bill could directly affect the exemption’s timeline, and that decisions should be made cautiously. When asked for a specific implementation date, he declined to commit to releasing the final rule this month or next.

Full Inclusion Under Securities Law: Two Categories of Tokenized Products

Beyond regulatory concerns, the legal classification and regulatory treatment of tokenized securities remain unresolved. To address this, Paul Atkins announced last November plans for a token classification system based on the Howey Test, clarifying which crypto assets qualify as securities and providing a clearer regulatory framework.

On January 28, the SEC formally released guidance for tokenized securities, supporting the market structure bill and offering market participants a clearer compliance path for related activities.

The guidance states that whether a security is regulated depends on its legal attributes and economic substance—not on tokenization. Tokenization itself does not alter the scope of securities law. Simply putting assets on-chain or tokenizing them does not change the applicability of federal securities law.

Under the SEC’s definition, tokenized securities are financial instruments presented as crypto assets, with ownership records maintained entirely or partially via cryptographic networks.

The guidance divides tokenized securities into two core categories: issuer-sponsored and third-party-sponsored, each with distinct regulatory requirements.

The first category is the issuer-direct tokenization model, where the issuer (or agent) uses blockchain technology to issue and record holder information, whether on-chain or off-chain. These tokenized securities must comply with the same registration and disclosure obligations as traditional securities.

The second category is the third-party tokenization model, which includes custodial types (where token holders have indirect ownership of custodial securities) and synthetic types (which only track the price of underlying securities without transferring ownership or voting rights). Such products may be classified as security-based swaps.

The guidance highlights the added risks of third-party tokenized products, noting that this model introduces counterparty and bankruptcy risks, and that certain products are subject to stricter security-based swap regulations.

The SEC also stated it is “open for business” and ready to engage with market participants on specific compliance paths, supporting companies in conducting innovative business under federal securities law.

With the SEC’s more granular oversight of RWA, regulatory arbitrage risk will be significantly reduced, paving the way for more traditional institutions to enter the market.

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