- Citadel, a leading American market-making firm, has spoken out against the SEC’s proposals to exempt tokenized assets from certain rules that bind traditional equities.
- The firm highlighted Gensler-era arguments on the similarities of defi protocols to traditional exchanges, while recommending the application of tight rules such as anti-money laundering, KYC, etc., to such protocols.
Citadel Securities, dubbed the largest American market maker, has spoken out against the Securities and Exchange Commission’s consideration to exempt tokenized equities from rules that pertain to traditional securities. The capital markets firm advises the Commission to classify DeFi trading protocols as exchanges and broker-dealers, where applicable, and to apply stringent investor protections to such intermediaries.
“Defi Trading Protocols Should Be Treated As Exchanges, Broker-Dealers”
In its comment on the SEC’s ongoing evaluation on whether to waive certain rules to encourage the trading of tokenized U.S. equities, Citadel Securities has called on the Commission to cancel the potential exemptions and instead, provide rulemaking based on the merits and strict assessments of the platforms that will facilitate the trading of tokenized assets.
“Ultimately, tokenized securities must succeed on the merits, rather than via regulatory exemptions; therefore, while we support Commission initiatives to champion innovation and position the U.S. as the leader in digital finance, it is important not to override key investor protections when trading tokenized securities,” stated Citadel.
A critical part of the firm’s comment is the classification of the intermediaries that will enable the trading of these tokenized US equities, especially “decentralized trading protocols.” The securities company urges the SEC to classify these defi platforms as exchanges and broker-dealers, citing some longstanding rules pertaining to existing securities platforms.
“The key bedrock principles and investor protections applicable to the secondary trading of U.S. equities should equally apply to the secondary trading of tokenized shares, particularly if transferring a digital ‘token’ automatically results in the transfer of the underlying U.S. equity,” argued Citadel.
In its estimation, the assumption that DeFi trading protocols do not involve intermediaries is often inaccurate. The first justification for Citadel’s claim is that DeFi protocols or decentralized exchanges “appear to bring together buyers and sellers for securities when facilitating the trading of tokenized U.S. equities.”
According to Citadel, defi protocols use system code to facilitate the execution of trading transactions between buyers and sellers via “established, non-discretionary methods. The firm recalls that such platforms fall into the SEC’s “securities exchange” category and must be treated as such.
To further strengthen its position, the US market maker reiterates that Defi trading protocols have people who write and modify the smart contracts and code, hence changing the rules and qualifying as exchanges in the SEC’s rulebook.
Strong Investor Protections For Defi Protocols
Consequently, Citadel asks the SEC to “ensure key investor protections” in tokenized U.S. equities, considering that most of the DeFi proponents pushing for exemptions in that regard qualify as exchanges and broker-dealers. Citadel noted that “granting broad exemptive relief” for trading tokenized shares through DeFi protocols could create diverging regulatory regimes for the same security.
The key investor protections proposed include the compulsory implementation of AML/KYC (Anti-money Laundering and Know Your Customer) requirements, the prohibition of insider trading, volatility controls, and market surveillance, among others.
Citadel’s comment has earned it harsh criticism from crypto enthusiasts, most of whom claim the firm is fighting against innovation under the pretext of championing investor protection. The crypto industry views the company’s letter to the SEC as a desperate effort to maintain a monopoly and reawaken impractical Gensler-era rules that will discourage competition from DeFi rivals.
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