• Citadel urged the SEC to treat major DeFi token trading as regulated market activity.
• The firm warned exemptions could create two rulebooks for the same tokenized security.
• Crypto figures blasted the move online, including Uniswap’s Hayden Adams and Mersinger.

Citadel Securities was criticized online after it called for tougher regulation from the U.S. Securities and Exchange Commission with regard to decentralized finance in the sphere of security tokens. The rebuke came after a public letter sent on Tuesday. In that letter, Citadel requested that the platform regard certain major DeFi activity as a regulated market function. The discussion spread rapidly on crypto social media.

In Citadel’s letter on Tuesday, the firm told the SEC to go all the way in identifying middlemen in trading of tokenized U.S. equities. Its request included those for decentralized trading protocols. Citadel also urged the agency to refrain from broad exemptive relief based on statutory definitions. Those definitions apply to “exchange” and “broker-dealer.”

Source: Letter

Risk of Two Rulebooks for One Security

Citadel cautioned that broad exemptions might divide oversight of the same security. It noted that a tokenized share traded through DeFi might be subject to different rules than the same share traded elsewhere. The company said that result was at odds with a “technology-neutral” policy. It said the Exchange Act should not promote one technology over another.

The firm contended that many DeFi protocols fall under the definition of an exchange. It cited matching buyers and sellers through non-discretionary means. Algorithms were among the examples of those methods that Citadel cited. It said these systems are able to organize trading interest in an organized way.

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Citadel also noted that a number of DeFi participants can fall under the definition of broker-dealers. It included trading apps, wallet providers and automated market makers. The letter addressed the use of transaction based compensation. It said that obtaining such payments may be an expression of broker-dealer behavior.

SEC Rulemaking Urged Over Broad DeFi Relief

The company argued that broad exemptions would weaken competition protections in the marketplace. It included fair access, post-trade transparency and market surveillance. It also pointed to anti-front-running rules and other investor protections. These moves support integrity in U.S. equity markets, Citadel said.

Citadel recommended the platform employ notice-and-comment rulemaking. It framed that path as more powerful than a broad exemption. The firm tied that process to the concept of applying “bedrock principles” to tokenization. It contended that investor protections must continue to be paramount as markets evolve.

The letter led to backlash from crypto leaders. To Maker a Change Uniswap founder Hayden Adams criticized on X — his post accused Citadel CEO Ken Griffin of “coming for DeFi.” Adams said he found Citadel’s claim around “fair access” challenging to believe.

In general terms, Adams also made clear his disdain for traditional market makers. He compared them with open-source, peer-to-peer tools. DeFi can reduce barriers to creating liquidity, he added. His post fueled the backlash to Citadel’s request to the regulator.

Summer Mersinger, CEO of the Blockchain Association advised the SEC to pass in what she called an “overbroad and unworkable” approach. Such an interpretation by Citadel is not rooted in the Exchange Act, she said. She also invoked decades of Commission practice and judicial precedent.

Mersinger differentiated between software builders and financial intermediaries. She argued that overseeing developers as intermediaries would undercut U.S. competitiveness. She warned that the policy would send innovation abroad. It would not, she added, further investor protection.

The matter is now before the SEC. The agency got Citadel’s suggestions in the Tuesday letter. The public reactions suggest just how contested tokenized equities are. What happens next will likely be determined by the calculus of whether the SEC values exemptions over formal rulemaking.

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