- Citadel Securities has urged the SEC to require certain DeFi protocols to register with the agency.
- Registration exemptions could fragment stock markets, the company said.
- DeFi developers have long argued that registration requirements would spell the end of the industry.
Citadel Securities, one of the largest market makers in the United States, has urged the Securities and Exchange Commission to require certain DeFi protocols and related companies to register as exchanges and broker-dealers.
In a letter to the agency on Tuesday, Citadel said an exemption from these registration requirements, coupled with stock tokenization, could create “a ‘shadow’ U.S. equity market,” fragmenting liquidity and undermining investor protections.
The letter is the latest example of traditional financial firms’ increasingly combative approach to light-touch crypto regulation.
Banks have spoken out against a perceived loophole in recently passed stablecoin legislation, which allows issuers to reward stablecoin holders.
According to banks, this alleged loophole could drain them of their deposit base and, therefore, their ability to lend.
Additionally, the letter comes at a time when lawmakers and the SEC are considering easing rules that have limited the integration of traditional financial markets with crypto technology.
Senators are engaged in negotiations over a crypto market structure bill that would largely hand oversight of the industry to the Commodity Futures Trading Commission.
And SEC Chairman Paul Atkins is embarking on a deregulation campaign dubbed “Project Crypto,” which could include exemptions from specific regulatory requirements.
“Often inaccurate”
Citadel’s letter inflamed DeFi supporters, who have long argued that registration requirements would functionally kill decentralized finance.
Registered exchanges and brokers are subject to a series of regulations that can only be met by centralized entities, DeFi proponents argue – an impossibility for self-executing software that cannot be unilaterally shut down or changed.
In a July letter to SEC Commissioner Hester Peirce, venture capital firm Andreessen Horowitz argued that DeFi protocols that enable peer-to-peer trading of tokenized stocks should be exempt from SEC registration requirements.
While proponents argue that DeFi protocols enable peer-to-peer exchange, this belief is “often inaccurate,” according to Citadel.
This is because users frequently interact with intermediaries when trading on decentralized exchanges, Citadel said.
The SEC’s definition of a regulated exchange or broker-dealer is broad, covering “any organization, association, or group of persons” that brings together buyers and sellers of securities.
Protocol developers, decentralized autonomous organizations, and the various foundations established to support protocol growth fit into this definition, Citadel argued, citing Uniswap’s creation of a legal entity in Wyoming as an example.
Additionally, according to Citadel, websites offering easy access to DeFi protocols often charge fees, just like traditional brokers.
“The original U.S. stock exchange was simply comprised of market participants transacting around a Buttonwood tree according to an agreed-upon set of rules,” Citadel wrote.
“Despite concerted efforts to persuade the Commission otherwise, a DeFi trading protocol that allows market participants to transact in accordance with an agreed set of rules enforced by the code is not fundamentally different.”
Registration exemptions would strengthen DeFi protocols at the expense of traditional trading platforms, the company added.
“Providing a broad exemption to facilitate the trading of tokenized stocks via DeFi protocols would create two separate regulatory regimes for trading the same security. This outcome would be the exact opposite of the ‘technology neutral’ approach taken by the Exchange Act, and would instead favor one technology over all others.”
Crypto lawyers and DeFi developers were furious.
“Citadel has just declared war on the Crypto project, echoing the arguments Gensler made in his failed attempt to regulate DeFi,” JW Verret, a law professor at George Mason University, wrote on X.
“There will be many letters of opposition.”
Aleks Gilbert is DL News’ DeFi correspondent based in New York. You can reach him at aleks@dlnews.com.
