A group of crypto organizations rejected Citadel Securities’ request that the Securities and Exchange Commission tighten decentralized finance regulations when it comes to tokenized stocks.
Andreessen Horowitz, the Uniswap Foundation, along with crypto lobby groups DeFi Education Fund and The Digital Chamber, among others, said they wanted to “correct several mischaracterizations of fact and misstatements” in letter to the SEC on Friday.
The group responded to a letter from Citadel earlier this month, which urged the SEC not to give DeFi platforms “broad relief” to offer trading in tokenized US stocks, arguing that they could likely be defined as an “exchange” or “broker-dealer” regulated by securities laws.
“Citadel’s letter is based on a flawed analysis of securities laws that attempt to extend the SEC’s registration requirements to virtually any entity with even the most tangential connection to a DeFi transaction,” the group said.
The group added that they share Citadel’s goals of investor protection and market integrity, but disagree “that achieving these goals always requires registration as traditional SEC intermediaries and cannot, in certain circumstances, be met through thoughtfully designed onchain markets.”
Citadel’s request would be impractical, the group says
The group argued that regulating decentralized platforms under securities laws “would be impractical given their functions” and could encompass a wide range of onchain activities that are not typically considered the offering of exchange services.
The letter also took aim at Citadel’s characterization that the autonomous software was an intermediary, arguing that it cannot be an “‘intermediary’ in a financial transaction because it is not a person capable of exercising independent discretion or judgment.”
“DeFi technology is a new innovation designed to address market risk and resilience in a different way than traditional financial systems do, and DeFi protects investors in ways that traditional finance cannot,” the group claims.
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In its letter, Citadel argued that by the SEC greenlighting tokenized shares on DeFi, it would “create two separate regulatory regimes for trading the same security” and would undermine “the ‘technology neutral’ approach taken by the Exchange Act.”
Citadel argued that exempting DeFi platforms from securities laws could harm investors, as the platforms would lack protections such as venue transparency, market oversight and volatility controls, among others.
The letter initially drew significant backlash, with Blockchain Association CEO Summer Mersinger saying Citadel’s position was an “overbroad and unenforceable approach.”
The letters come as the SEC seeks feedback on how it should approach regulating tokenized stocks, with agency chairman Paul Atkins saying the US financial system could embrace tokenization in “a few years.”
Tokenization has exploded in popularity this year, but NYDIG warned on Friday that onchain assets won’t immediately be of much use to the crypto market until regulations allow for deeper integration with DeFi.
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