Citadel causes uproar for urging SEC to regulate DeFi tokenized stocks

Market maker Citadel Securities has recommended that the Securities and Exchange Commission tighten regulations on decentralized finance when it comes to tokenized stocks, causing backlash from crypto users.

Citadel Securities told the SEC in a letter on Tuesday that DeFi developers, smart-contract coders, and self-custody wallet providers should not be given “broad exemptive relief” for offering trading of tokenized US equities.

It argued that DeFi trading platforms likely fall under the definitions of an “exchange” or “broker-dealer” and should be regulated under securities laws if offering tokenized stocks.

“Granting broad exemptive relief to facilitate the trading of a tokenized share via DeFi protocols would create two separate regulatory regimes for the trading of the same security,” it argued. “This outcome would be the exact opposite of the “technology-neutral” approach taken by the Exchange Act.”

Citadel’s letter, made in response to the SEC looking for feedback on how it should approach regulating tokenized stocks, has drawn considerable backlash from the crypto community and organizations advocating for innovation in the blockchain space.

Crypto users, Blockchain Association hits out 

“Whoever thought Citadel would be against innovation that removes predatory, rent-seeking intermediaries from the financial system?” asked lawyer and Blockchain Association board member Jake Chervinsky on Thursday.

“Oh, right, literally every single person in crypto,” he added. 

Uniswap founder Hayden Adams added that it “makes sense the king of shady TradFi market makers doesn’t like open source, peer-to-peer tech that can lower the barrier to liquidity creation.”

Summer Mersinger, CEO of the crypto advocacy group the Blockchain Association, said that “regulating software developers as if they were financial intermediaries would undermine US competitiveness, drive innovation offshore, and do nothing to advance investor protection.” 

Source: Blockchain Association

“We urge the SEC to reject this overbroad and unworkable approach and instead focus regulatory attention on actual intermediaries who stand between users and their assets,” she added.

Related: Tokenized money market funds surge to $9B; BIS warns of new risks

Citadel wrote to the SEC’s Crypto Task Force in July to argue that tokenized securities “must achieve success by delivering real innovation and efficiency to market participants, rather than through self-serving regulatory arbitrage.”

SIFMA also urges no DeFi carve-out 

The Securities Industry and Financial Markets Association (SIFMA), an industry trade group, issued a similar statement on Wednesday, supporting innovation but insisting that tokenized securities must be subject to the same fundamental TradFi investor protections. 

It argued that recent disruptions in crypto markets, including the October flash crash, were “timely reminders of why long-standing securities regulatory frameworks designed to preserve market quality and protect investors were originally created.” 

The statement echoes the stance the trade group took in July, rejecting any SEC exemptive relief for blockchain and DeFi platforms that issue tokenized assets. 

In November, the World Federation of Exchanges, a group representing major stock exchanges, urged the SEC to abandon its plan to grant an “innovation exemption” to crypto companies seeking to offer tokenized stocks.

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