Market maker Citadel Securities has recommended that the Securities and Exchange Commission tighten regulations on decentralized finance (DeFi) when it comes to tokenized stocks, a move that has caused significant backlash from crypto users.
In a letter submitted to the SEC, Citadel Securities stated that DeFi developers, smart-contract coders, and self-custody wallet providers should not be granted "broad exemptive relief" for offering the trading of tokenized U.S. equities. The firm argued that DeFi trading platforms likely fall under the definitions of an "exchange" or "broker-dealer" and, consequently, should be regulated under existing securities laws if they are involved in offering tokenized stocks.
Citadel Securities contended that granting broad exemptive relief to facilitate the trading of tokenized shares via DeFi protocols would lead to the establishment of two distinct regulatory regimes for the trading of the same security. This outcome, they argued, would directly contradict the "technology-neutral" approach that the Exchange Act is intended to uphold.
The letter from Citadel, which was submitted in response to the SEC's request for feedback on its approach to regulating tokenized stocks, has ignited considerable backlash from the cryptocurrency community and various organizations that advocate for innovation within the blockchain space.
Crypto Community and Blockchain Association Respond
Jake Chervinsky, a lawyer and board member of the Blockchain Association, questioned the stance taken by Citadel Securities. He asked rhetorically if anyone in the crypto space was surprised that Citadel, a prominent player in traditional finance market making, would oppose innovations that aim to remove intermediaries from the financial system.
Hayden Adams, the founder of Uniswap, echoed this sentiment, suggesting that it is unsurprising that a major traditional finance market maker would be resistant to open-source, peer-to-peer technology that has the potential to lower the barriers to liquidity creation.
Summer Mersinger, CEO of the Blockchain Association, stated that regulating software developers as if they were financial intermediaries would have detrimental effects. She argued that such an approach would undermine U.S. competitiveness, drive innovation offshore, and ultimately fail to advance investor protection. Mersinger urged the SEC to reject this "overbroad and unworkable approach" and instead concentrate regulatory attention on actual intermediaries that operate between users and their assets.
Citadel had previously communicated with the SEC's Crypto Task Force in July, arguing that tokenized securities must achieve success by offering genuine innovation and efficiency to market participants, rather than by exploiting regulatory loopholes.
SIFMA Shares Similar Concerns Regarding DeFi Exemptions
The Securities Industry and Financial Markets Association (SIFMA), a significant industry trade group, issued a statement that echoed similar concerns. While supporting innovation, SIFMA insisted that tokenized securities must be subject to the same fundamental investor protections that exist within traditional finance.
SIFMA pointed to recent disruptions in crypto markets, including the October flash crash, as stark reminders of the necessity of long-standing securities regulatory frameworks designed to maintain market quality and protect investors.
This position aligns with the stance the trade group took in July, when it rejected any SEC exemptive relief for blockchain and DeFi platforms involved in issuing tokenized assets.
Furthermore, in November, the World Federation of Exchanges, an organization representing major stock exchanges globally, urged the SEC to reconsider its plan to grant an "innovation exemption" to crypto companies seeking to offer tokenized stocks.