Tokenized equities face resistance from prominent Wall Street firm Citadel Securities in letter to SEC

One of the world’s largest market makers, Citadel Securities, is urging the U.S. Securities and Exchange Commission to treat tokenized equities the same as their more traditional counterparts amid a push from crypto firms to launch those assets. 

In a letter sent to the SEC Crypto Task Force this week, the firm said the agency should avoid exemptions from securities rules and should focus on market liquidity and investor protection. 

“Simply put, while we strongly support technological innovations designed to address market inefficiencies, seeking to exploit regulatory arbitrage for ‘look-a-like’ securities is not innovation,” the market maker said in the letter. Ken Griffin, a billionaire donor to the Republican party, founded Citadel Securities. 

Tokenized equities are digital tokens that represent shares of traditional assets on a blockchain and can trade 24/7 as opposed to traditional stocks that trade certain hours Monday through Friday. Some crypto firms, including Coinbase and Kraken, have shown interest in launching tokenized equities. If they get approval from the SEC, that could allow them to offer blockchain-based trading of traditional stocks and put them in direct competition with other, more traditional finance brokerages.

Citadel says it has concerns about tokenized assets siphoning liquidity away from traditional markets and says investor confusion on who is issuing the asset. 

Republican SEC Commissioner Hester Peirce has clarified that tokenized securities are still securities so have to follow the agency’s rules. Later during a call with reporters last week, SEC Chair Paul Atkins said the agency’s staff was looking into an “innovation exception that would permit novel ways of trading.” 

“It’s hard to say exactly where things will go or what will happen, but assets clearly are moving on chain,” Atkins said. “So if it can be tokenized, it will be tokenized.”

Meanwhile, said TD Cowen’s Jaret Seiberg in a note on Monday that it’s unclear how tokenized trading would work, in part on how to find the best price. 

“The traditional equity trading regime requires trades to be at the national best price,” Seiberg said. “This is what permits trading to occur on multiple venues. We believe there are obstacles to this working when stocks are tokenized.” 

Citadel says the SEC should not grant exemptive relief and said the agency should instead hold roundtables and pursue rulemaking. 

“It is incumbent that the Commission pursue a deliberative and transparent process as it evaluates these exemptive requests, including providing an opportunity for public notice and comment and adequately assessing the costs and benefits,” the firm said. 

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