The DeFi industry opposes the proposal to tighten regulation of tokenization as securities by Citadel

Organizations and figures supporting DeFi and crypto are pushing back against Citadel Securities’ view that the US Securities and Exchange Commission (SEC) should impose stricter regulations on “intermediaries” in DeFi, especially in the realm of tokenized securities, arguing that Citadel’s reasoning is “baseless.”

In a letter sent to the SEC on Friday, the DeFi Education Fund, Andreessen Horowitz (a16z), The Digital Chamber, Uniswap Foundation, and several other organizations stated they want to “clarify some factual inaccuracies and misleading statements.”

“Citadel’s argument, based on a somewhat flawed analysis of securities law, attempts to extend registration requirements with the SEC to almost any entity, including those with only indirect involvement in a DeFi transaction,” industry representatives wrote.

This correspondence occurs amid ongoing signals from the SEC that the agency views innovation as beneficial to capital markets. SEC Chairman, Mr. Paul Atkins, has emphasized that the SEC needs to create pathways for market participants to comply with existing regulations.

Tokenization—the process of bringing real-world assets such as stocks and bonds onto the blockchain—has surged over the past year. While regulators see blockchain technology as a potential tool to modernize the US financial system, tokenization still raises many complex questions and warrants cautious examination.

Tensions between Citadel Securities and the crypto industry escalated after the market maker sent a letter to the SEC last week, urging the agency to fully identify all intermediaries involved in the trading of tokenized US securities, including decentralized trading protocols. Citadel argued that these protocols often resemble exchanges or broker-dealers—self-trading under the SEC’s current classification.

“Concluding that no party meets the definition of ‘broker’ or ‘dealer’ would imply that the technology used is more important than the service provided, which could call into question the legal treatment of companies that have long been registered with the Commission,” wrote Mr. Stephen John Berger, Citadel’s Head of Government Affairs and Global Regulation.

Citadel’s letter was met with a wave of opposition from parts of the crypto industry, which argued that this approach is “not feasible.” The crypto sector has long maintained that DeFi operates differently from traditional finance, particularly because there are no direct intermediaries, making it very difficult or even impossible to apply the same set of rules.

At a SEC Advisory Committee meeting earlier this month, Mr. Jonah Platt, CEO and Head of US Government Affairs and Regulation at Citadel Securities, acknowledged that tokenizing US stocks could benefit investors. However, he warned that granting overly broad exemptions for DeFi could have negative consequences for investors.

In response to the SEC letter sent on Friday, a Citadel Securities spokesperson expressed support for tokenization but emphasized the importance of investor protection.

“As stated in our comments, Citadel Securities strongly supports tokenization and other innovations to reinforce the US’s leading position in digital finance. However, this does not mean sacrificing strict investor protection standards—elements that have made the US stock market a global benchmark,” the spokesperson said.

Signatories of the letter on Friday argued that “automated software” and “technology infrastructure” should not be considered intermediaries under SEC definitions, mainly because traders still control their assets. “These definitions must be applied with great caution to avoid unintentionally including software developers—who do not hold or control user assets,” the letter clarifies.

Earlier that day, the SEC issued a (no-action letter) to Deposit Trust Company (DTC), allowing the organization to offer tokenization services for real-world assets being held in custody. According to the letter, DTC is permitted to tokenize a specified set of assets, including stocks in the Russell 1000 index, ETFs tracking major US stock indices, as well as treasury bills, bonds, and US government securities.