DeFi groups fire back against Citadel Securities’ call for ‘flawed’ SEC tokenization rules

Decentralized finance and crypto proponents are pushing back against Citadel Securities’ stance that the Securities and Exchange Commission should impose stricter rules on DeFi “intermediaries” — particularly for tokenized securities — calling the firm’s position “flawed.”

In a letter sent on Friday to the SEC, the DeFi Education Fund, Andreessen Horowitz, The Digital Chamber, Uniswap Foundation, and others said they aimed 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.

The epistolary exchange comes as the SEC continues to signal that it views innovation as beneficial to capital markets. Chair Paul Atkins has said the agency must create pathways for market participants to comply with existing regulations. 

Tokenization, the process of representing real-world assets like stocks and bonds onchain, has surged in popularity over the past year. While regulators have signaled that blockchain technology could help modernize the U.S. financial sector, tokenization presents complicated questions and deserves a closer look. 

Tension between Citadel Securities and the crypto industry escalated after the market maker sent a letter to the SEC last week that said the agency should fully identify intermediaries involved in the trading of tokenized U.S. equities, including decentralized trading protocols, which they argued often resemble exchanges or broker-dealers under the SEC’s existing classification. 

“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 who have long registered with the Commission,” Citadel Global Head of Government & Regulatory Policy Stephen John Berger wrote.

Difficult to comply?

At the time, Citadel’s letter sparked backlash from some in the crypto industry who called the market maker’s approach “unworkable.” The crypto industry has long argued that DeFi works differently from more traditional finance, in part because there are no direct intermediaries, making it difficult if not impossible to comply with the same rules.

Speaking at an SEC Advisory Committee meeting earlier this month Jonah Platt, managing director and U.S. head of government and regulatory policy at Citadel Securities, said tokenization of U.S. equities can benefit 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 said the firm supports tokenization, but highlighted investor protections. 

“As detailed in our comment letters, Citadel Securities strongly supports tokenization and other innovations that can reinforce America’s leadership in digital finance, but this does not require sacrificing the rigorous investor protections that have made U.S. equity markets the global gold standard,” the spokesperson said in an email to The Block. 

The groups in Friday’s letter say “autonomous software” and “technological infrastructure” cannot be considered intermediaries under the SEC’s statutory definitions primarily because traders remain in control over their assets. “These definitions must be carefully applied so that they do not inadvertently scope in software developers who do not have custody or control over users’ assets,” their letter reads. 

Earlier on Friday, the SEC sent a no-action letter to the Deposit Trust Company, clearing it to offer a tokenization service for custodied RWAs. Under the No-Action Letter, DTC may tokenize a defined set of assets that includes Russell 1000 constituents, ETFs tracking major U.S. equity indices, and U.S. Treasury bills, bonds, and notes.

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