Summary — Citadel Securities has formally urged the U.S. SEC to treat decentralized-finance (DeFi) platforms that offer tokenized U.S. stocks as fully regulated “exchanges” or “broker-dealers,” rather than giving them carve-outs or exemptive relief. The firm warns that broad exemptions would harm market integrity, liquidity, and investor protections — triggering a fierce response from parts of the crypto industry.
What Citadel is asking for — and why
- In a letter submitted on December 2, 2025 to the SEC’s Crypto Task Force, Citadel argued that many DeFi trading protocols meet the statutory definitions of exchange or broker-dealer because they use algorithmic, non-discretionary matching of buyers and sellers and often receive transaction-based fees — characteristics typical for traditional trading venues.
- The firm warned that granting broad exemptions for tokenized U.S. equities would create dual regulatory regimes for economically identical securities — one for traditional equities and another for tokenized ones — undermining the “technology-neutral” principle the U.S. equity markets are supposed to follow.
- Key market-structure and investor-protection rules — such as fair access, pre- and post-trade transparency, custody, trade surveillance, anti-front-running safeguards, and best execution standards — should apply equally, Citadel insisted.
Citadel called for any regulatory changes to proceed via full notice-and-comment rulemaking, rather than one-off exemptions or guidance that could leave critical gaps in oversight.
Risks and concerns cited by Citadel
According to Citadel’s submission and affiliated reporting, broad tokenization without equivalent oversight — or “regulatory arbitrage,” as they call it — could cause several harms:
- Liquidity fragmentation and dilution — parallel trading venues may siphon liquidity away from established equity markets, weakening overall market depth and reducing efficiency for issuers and investors.
- Loss of transparency and investor protections — tokenized platforms may lack safeguards integral to traditional stock markets: clear rules on custody, reporting, settlement, compliance, fee disclosure, and trade surveillance.
- Confusion over shareholder rights and regulatory compliance — tokenized “look-alike” equities marketed as equivalent to real shares could mislead investors regarding actual shareholder status, dividends, voting rights, legal protections, or issuer obligations.
Citadel underscored that innovation should not come at the cost of market integrity — and stressed that tokenization should be accommodated only if the same regulatory guardrails that apply to traditional equity trading remain in place.
Reaction from the crypto / DeFi community & industry groups
The call from Citadel has stirred strong pushback:
- Some in the crypto community criticized the move as an attempt by large traditional-finance players to ward off competition from open-source and decentralized systems.
- Advocates argue that many DeFi platforms are fundamentally different from centralized intermediaries: open-source, permissionless, and built around transparent smart contracts — and that subjecting them to legacy rules may stifle innovation.
- Industry-wide bodies, including SIFMA and World Federation of Exchanges (WFE), have also flagged concerns over tokenized stock trading — warning that it may bypass decades-old safeguards for investors and market stability.
What’s at stake for the markets (and regulation)
- Regulatory precedent & consistency — The SEC’s response could set the tone for how tokenized securities are treated across the U.S. — whether as distinct crypto assets or as equivalent to traditional equities.
- Market structure integrity — Allowing tokenized equities under a lighter or different regulatory framework might lead to fragmented liquidity, inconsistent protections, and competitive distortions between legacy exchanges and decentralized platforms.
- Investor protection & transparency — Without proper regulation, retail investors may face higher risk, including unclear custody, unclear legal rights, corporate-governance dilution, and lack of recourse in disputes.
- Innovation vs regulation balance — The broader crypto industry’s growth — especially around decentralized and programmable finance — may hinge on the regulatory path. Overly restrictive approaches might dampen growth, while loose regulation might invite systemic risk.
What to watch next
- Whether the SEC initiates a formal rule-making process (public consultation / notice-and-comment) on tokenized stock regulation, as urged by Citadel.
- How DeFi platforms, blockchain developers, and crypto advocacy groups respond — especially proposals for compliance frameworks, disclosures, custody standards, and interoperability with legacy systems.
- Whether new hybrid models emerge: platforms that tokenize equities but also register as regulated exchanges or brokers, blending DeFi’s efficiencies with TradFi compliance.
- Market and issuer response: public companies may need to consider how tokenization affects shareholder record-keeping, voting rights, and regulatory compliance.
Conclusion
Citadel Securities’ push signals a growing divide between traditional financial institutions and decentralized finance over how tokenized equities should be governed. The firm’s core argument — that blockchain-based trading of U.S. stocks should not be exempt from established securities law — highlights real concerns over market stability, investor protection and fairness. How regulators respond will likely shape the future of tokenization and its role in capital markets.