The DeFi Education Fund has spearheaded a response against Citadel Securities’ push for the SEC to apply securities laws to DeFi platforms trading in tokenized stocks.

A coalition including Andreessen Horowitz, the Uniswap Foundation, and crypto advocacy groups like the DeFi Education Fund and The Digital Chamber aimed to clarify what they deemed “factual errors and misleading claims” in a recent letter sent to the SEC.

This reaction comes after Citadel’s earlier request that the SEC should refrain from giving DeFi platforms any significant exemptions regarding the trading of tokenized US equities. They argued that these platforms might be classified as “exchanges” or “broker-dealers” under existing securities laws.

The coalition stated:

“Citadel’s letter rests on a flawed analysis of the securities laws that attempts to extend SEC registration requirements to essentially any entity with even the most tangential connection to a DeFi transaction.”

(Translation: Citadel’s assertions are fundamentally misguided and seek to impose broader SEC compliance than warranted.)

While the group recognized the importance of investor protection and market integrity, they contested that these objectives do not always require traditional SEC registration and could be achieved through carefully designed on-chain markets.

Concerns Over Citadel’s Proposal

The organizations claimed that regulating decentralized platforms under securities laws would be impractical, as it would encompass a wide array of blockchain activities that do not typically fall under exchange services.

They also refuted Citadel’s labeling of autonomous software as an intermediary, stating that software cannot be regarded as a “middleman” in financial transactions because it lacks the capability of independent judgment or discretion.

In their defense, the group stated,

“DeFi technology is a new innovation designed to mitigate market risks and offer resilience differently than traditional financial systems, protecting investors in ways not available in conventional finance.”

(Translation: DeFi represents a novel approach to enhancing market stability and investor security that traditional finance struggles to provide.)

Citadel previously contended that allowing tokenized shares on DeFi would result in two separate regulatory frameworks governing the same security, jeopardizing the ‘technology-neutral’ strategy prescribed by the Exchange Act.

Concerns were raised that exempting DeFi platforms from securities regulations could endanger investors by removing essential safeguards like venue transparency and market oversight.

The backlash was immediate, with Blockchain Association CEO Summer Mersinger describing Citadel’s approach as overly broad and impractical.

These discussions occur as the SEC is seeking input on how to regulate tokenized stock offerings. Agency chair Paul Atkins has expressed that the US financial system might come to accept tokenization within a couple of years. Tokenization has surged in popularity this year, but NYDIG cautioned that the benefits of on-chain assets will not be fully realized until regulatory conditions permit deeper integration with DeFi.

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