Aren’t decentralized finance (DeFi) protocols delivering on what they promise to the crypto industry? Citadel Securities, a prominent name in the hedge fund and market-making niche, has doubts about the true nature of certain DeFi protocols handling tokenized US equities. In a letter to the US Securities and Exchange Commission (SEC), the company said these protocols act like traditional exchanges.
The official letter did not explicitly mention regulating DeFi platforms, but the idea was to keep an eye on tokenized stocks, which mostly trade on DeFi infrastructure.
Citadel urged the SEC to regulate DeFi platforms, citing that they match buyers and sellers via smart contracts, which is a typical feature of a traditional exchange.
In reality, Citadel and other similar traditional finance (TradFi) platforms stand between buyers and sellers, and quote prices as well as provide liquidity. The hedge fund firm is referring to this situation and denoting DeFi platforms providing tokenized stocks as traditional exchanges.
So, are DeFi platforms acting like TradFi?
The answer to this question could be a mix of yes and no. If we derive the Citadel executives’ viewpoint, a tokenized equity is always an equity, even if it is the digital representation on a blockchain (tokenization). Equities fall under securities law, which does not change when they are traded as tokens. These laws connect dots to traditional finance.
Another crucial point is that TradFi must comply with several obligations, including best execution, surveillance, and fair access. However, decentralized finance does not typically fall under the same enforcement.
For Citadel, DeFi platforms perform the same functions as TradFi, but without facing any scrutiny. All these arguments are plausible for Citadel, and the company executives wrote a letter to the commission to tighten its screws on DeFi.
DeFi and TradFi differ in technology
However, a decentralized ecosystem has different setups when compared to traditional platforms. They have smart contracts, blockchain, nodes, validators, miners, and so much more. As these technical elements make it a unique technology, the functionalities on such platforms do not necessarily have to fall under TradFi rules.
Hayden Adams, the founder of the Uniswap protocol, gave a scathing remark towards Citadel’s proposal. He wrote in an X post that the hedge fund firm wants DeFi to be inside a compliance box, making it very risky for developers to build the ecosystem and push it under TradFi.
Citadel wrote in the letter: “Tokenized U.S. equities should be treated in the same manner as traditional equity securities from a regulatory perspective, particularly when it comes to principles such as best execution, fair access, and pre- and post-trade transparency.”
Hayden Adam emphasized that DeFi is already permissionless, and fair access is already a key integral part of it.
Blockchain Association slams back
Blockchain Association, a crypto policy-making group in the US, chimed that Citadel’s “interpretation has no grounding in the Exchange Act” or any legal foundation.
The argument also lacks support from “decades of Commission practice, judicial precedent, or the commonsense distinction between those who build software and those who custody assets”, said the association.
While Citadel’s claims on tokenized stocks on DeFi platforms look reasonable, blockchain groups and experts do not find any plausible meaning in them. DeFi’s tokenized stocks are, in fact, an innovation that cannot be cracked down on.
