Decentralized finance and crypto advocates are pushing back against Citadel Securities’ call for the Securities and Exchange Commission to impose tougher rules on DeFi “intermediaries,” especially around tokenized securities, dismissing the firm’s stance as “flawed.”
In a Friday letter to the SEC, the DeFi Education Fund, Andreessen Horowitz, The Digital Chamber, the Uniswap Foundation, and others said they sought to “correct several factual mischaracterizations and misleading statements.”
“Citadel’s letter rests on a flawed analysis of the securities laws that attempts to extend SEC registration requirements to essentially any entity with even the most tangential connection to a DeFi transaction,” the crypto advocates wrote.
SEC weighs innovation amid rising tokenization debate
The letter exchange comes as the SEC maintains that innovation can benefit capital markets. Chair Paul Atkins has emphasized the agency’s need to provide clear pathways for market participants to stay compliant with existing regulations.
Tokenization, the process of representing real-world assets like stocks and bonds onchain, has gained significant attention over the past few months. This practice still presents complicated questions and needs more attention, while regulators have signalled that blockchain technology could help modernize the U.S. financial sector.
Conflict between Citadel Securities and the crypto industry intensified after the market maker sent a letter to the SEC last week, urging the agency to identify all intermediaries involved in trading tokenized U.S. equities. Citadel argued that decentralized trading protocols often function like exchanges or broker-dealers under existing SEC classifications.
“To conclude that there are no participants that meet the definitions of a ‘broker’ or ‘dealer’ would again suggest that the technology used matters more than the services provided, and would potentially call into question the regulatory treatment of firms that have long registered with the Commission,” Citadel Global Head of Government & Regulatory Policy Stephen John Berger wrote.
Citadel’s letter prompted backlash from some in the crypto industry who referred to the market maker’s approach as “unworkable.”
Crypto advocates argue that DeFi transactions are inherently peer-to-peer, with no centralized entity controlling users’ funds. As such, applying traditional SEC registration rules could unfairly target developers and infrastructure providers who do not hold custody of users’ assets.
Addressing the SEC Advisory Committee meeting earlier this month, Jonah Platt, managing director and U.S. head of government and regulatory policy at Citadel Securities, noted that tokenization of U.S. equities could prove beneficial to investors, but said granting broad exemptions for DeFi could have negative consequences for investors.
In response to the letter on Friday, a Citadel Securities spokesperson affirmed the firm’s support for tokenization while emphasizing the importance of investor protections.
When questioned by reporters, the spokesperson said in an email that, as detailed in their comment letters, Citadel Securities strongly supports tokenization and other innovations that can reinforce America’s leadership in digital finance. Still, the individual noted that this does not require sacrificing the rigorous investor protections that have made U.S. equity markets the global gold standard.
Tokenization and regulatory clash highlight industry tensions
The group’s Friday letter argued that “autonomous software” and “technological infrastructure” should not fall under the same category used by the SEC in its statutory definitions, since traders retain control over their own assets. “These definitions must be applied carefully to avoid inadvertently including software developers who neither hold custody of nor control users’ assets,” the letter stated.
Earlier that day, the SEC issued a no-action letter to the Depository Trust Company (DTC), allowing it to provide a tokenization service for custodied real-world assets (RWAs). Under the letter, DTC may tokenize a specific set of assets, including Russell 1000 constituents, ETFs tracking major U.S. equity indices, and U.S. Treasury bills, bonds, and notes.
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