Citadel Securities is urging the U.S. Securities and Exchange Commission (SEC) to proceed cautiously with the integration of tokenized stocks into the financial system. In a letter to the SEC's Crypto Task Force, the firm expressed concerns that a hasty implementation could create investor confusion and unfairly benefit certain exchanges and private companies. This request follows SEC Chairman Paul Atkins' expressed interest in revising existing regulations to accommodate crypto-based securities.
Citadel is advocating for a structured rulemaking process to avoid regulatory loopholes, emphasizing that tokenized products should succeed on their merits, not through regulatory arbitrage. Stephen Berger of Citadel Securities stated that "tokenized securities must achieve success by delivering real innovation and efficiency to market participants, rather than through self-serving regulatory arbitrage". The firm is pushing for a transparent rulemaking process with full public input, which has not yet occurred. In response, the SEC has acknowledged the chairman's public stance but has not offered further comment.
A tokenized security is a digital representation of a security traded on a blockchain network, rather than through traditional brokerages. These tokens can be divided into smaller, more affordable units, increasing accessibility for a wider audience. However, Citadel's letter warns that without proper regulations, the rollout of these products could harm the initial public offering (IPO) market. The firm suggests that providing private companies with an alternative fundraising avenue could further reduce public market deals. Additionally, capital could be diverted to new digital trading pools, potentially excluding institutional investors like pensions and banks that face restrictions on crypto exposure.
Citadel's concerns echo those raised in a similar letter by the Securities Industry and Financial Markets Association (SIFMA). While Citadel did not name specific entities, their concerns alluded to a prior letter from Coinbase. Citadel's desire to maintain "best execution, fair access, and pre- and post-trade transparency" aligns with sentiments expressed by the CEO of Charles Schwab.
Citadel's Berger believes that regulatory changes should apply broadly to the entire market, rather than benefiting only a select few firms. He prefers a formal rulemaking process over exemptive reliefs that could lead to "self-serving regulatory arbitrage that preferences tokenized U.S. equities over listed equity securities". The concern is that large entities receiving exemptions could rapidly expand their customer base, leaving the rest of the market struggling to catch up.
The SEC's plan to streamline securities tokenization aims to reduce costs and increase efficiency by minimizing intermediaries, shortening settlement times, and enabling fractional ownership of financial assets. A World Economic Forum report highlighted the potential for exponential growth in capital markets as more institutions recognize these advantages. Major players like BlackRock and Franklin Templeton, along with crypto-focused platforms like Coinbase and Robinhood, have already entered the tokenization space. The value of tokenized real-world assets is currently estimated at around $25 billion.
SEC Chair Paul Atkins has compared the potential impact of tokenization to the evolution of audio formats and has suggested introducing an "innovation exemption" to encourage its development. Despite growing regulatory support, Citadel cautions that asset tokenization could "siphon liquidity" from traditional stock markets and create "new liquidity pools that are inaccessible" to key institutional investors.
