Decentralized finance (DeFi) proponents are in disagreement with Citadel Securities' urging of the Securities and Exchange Commission (SEC) to implement stricter regulations on DeFi "intermediaries," particularly concerning tokenized securities. Crypto groups are challenging Citadel Securities' stance, deeming it "flawed".
In a letter to the SEC, the DeFi Education Fund, Andreessen Horowitz, The Digital Chamber, Uniswap Foundation, and others aimed to address what they view as "factual mischaracterizations and misleading statements". They argue that Citadel's analysis of securities laws is flawed and attempts to extend SEC registration requirements to entities with even the slightest connection to a DeFi transaction.
Citadel Securities' recommendations to the SEC include tightening regulations on decentralized finance when it comes to tokenized stocks. In a letter, Citadel argued that DeFi developers, smart-contract coders, and self-custody wallet providers should not be given “broad exemptive relief” for offering trading of tokenized U.S. equities. They also state 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.
The firm also warned against creating separate regulatory frameworks for tokenized shares traded via DeFi protocols, as this approach would contradict the technology-neutral stance established by the Exchange Act and create inconsistent oversight.
According to Citadel, tokenized securities should follow traditional investor protections. A spokesperson stated that Citadel Securities supports tokenization and other innovations that can reinforce America's leadership in digital finance but that this doesn't require sacrificing the rigorous investor protections that have made U.S. equity markets the global gold standard.
The crypto community has criticized Citadel's stance as an attempt to maintain control over the market and stifle innovation. Jake Chervinsky, lawyer and Blockchain Association board member, stated that it makes sense that the king of shady TradFi market makers doesn't like open source, peer-to-peer tech that can lower the barrier to liquidity creation. Uniswap founder Hayden Adams echoed this sentiment. 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.
Those in opposition to Citadel's position argue that "autonomous software" and "technological infrastructure" cannot be considered intermediaries under the SEC's statutory definitions, primarily because traders remain in control of their assets. They emphasize that these definitions must be carefully applied so that they do not inadvertently include software developers who do not have custody or control over users' assets. In true DeFi protocols, traders maintain direct control of their assets through self-custody wallets, and the code merely executes pre-programmed functions without human discretion.
This regulatory showdown could shape the future of digital assets. Stricter rules could slow DeFi development but might offer clearer investor safeguards. The fight centers on whether software code or human actors are in control of tokenized securities transactions, and regulation will determine how easily traditional assets like stocks can be represented and traded on blockchain networks.
Tokenization, the process of representing real-world assets like stocks and bonds on-chain, has surged in popularity over the past year. DeFi tokenization is the process of converting assets, whether real estate, commodities, or digital goods, into blockchain-based tokens. These tokens represent ownership, rights, or value and can be traded, staked, or used as collateral in decentralized finance platforms.
