- Citadel Securities is calling on the US Securities and Exchange Commission (SEC) to regulate certain DeFi systems, specifically those dealing with tokenized US equities, as traditional exchanges or broker-dealers to ensure compliance and transparency in the cryptocurrency market.
- The firm warns that a more lenient regulatory approach could create gaps in investor protection and market transparency, which could have significant implications for crypto trading platforms and digital asset markets.
- However, this stance has sparked backlash from crypto advocates who argue that treating open-source protocol developers like centralized intermediaries could stifle innovation in the DeFi space and hinder the growth of decentralized finance.
Citadel Securities has urged US regulators to treat certain decentralized finance (DeFi) systems more like traditional market infrastructure, prompting a backlash from crypto advocates and sparking a debate about the future of cryptocurrency regulation.
In a Dec. 2 letter to the US Securities and Exchange Commission (SEC), filed as part of its consultation on how securities laws should apply to crypto trading platforms, Citadel said certain DeFi protocols dealing in tokenised US equities exhibit similarities to exchanges or broker-dealers, highlighting the need for clear regulatory guidelines in the digital asset market.
The firm argued that, even when trades are carried out through smart contracts instead of a central operator, the systems still match buyers and sellers under preset rules in ways regulators already oversee in traditional markets, emphasizing the importance of regulatory consistency across traditional and digital markets.
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Citadel Warns SEC of Potential Transparency and Compliance Gaps in DeFi Regulation
Citadel told the SEC that any lighter-touch regulatory regime for DeFi should only be considered after closely examining investor-protection risks and ensuring that regulatory requirements are met, highlighting the need for a balanced approach to DeFi regulation.
The response angered many in the crypto sector once the letter became public, with some arguing that Citadel’s stance could hinder innovation in the DeFi space and others calling for clearer regulatory guidelines to ensure compliance and transparency in cryptocurrency markets.
The Securities and Financial Markets Association (SIFMA) made a similar warning this week:
The SEC should exercise great caution to ensure that innovation in DeFi and digital assets strengthens rather than weakens the regulatory architecture that tens of millions of American families rely on to save and invest, and that issuers rely on to raise capital. This requires evaluating whether exempting participants in tokenized securities markets from securities law registration and other requirements is consistent with protecting investors, serving the public interest, and maintaining fair competition across both tokenized and traditional markets.
Securities and Financial Markets Association (SIFMA) Uniswap founder Hayden Adams said Citadel’s position effectively treats open-source protocol developers as if they were centralized intermediaries, which could have significant implications for the future of DeFi and cryptocurrency innovation. He also rejected Citadel’s suggestion that DeFi cannot ensure “fair access,” arguing that permissionless systems broaden participation rather than limit it, promoting financial inclusion and decentralized governance.
Crypto policy commentator “BlockProf” said Citadel was echoing arguments previously made by SEC Chair Gary Gensler in his push to bring DeFi under existing rules, and attacking points raised by SEC Commissioner Hester Peirce in her dissent, highlighting the ongoing debate over DeFi regulation and the need for clear regulatory guidelines in the cryptocurrency market.
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