DeFi vs. Wall Street: Blockchain Association challenges Citadel over SEC's innovation exemption

The Blockchain Association is challenging one of the world's largest market makers, Citadel Securities, over how the Securities and Exchange Commission should treat decentralized finance protocols, as tokenization of financial markets gains momentum.

On Monday, the crypto advocacy group sent a response to the SEC, addressing Citadel's letter in December that argued for stricter oversight over DeFi.

In December, Citadel said that many DeFi protocols meet the definition of an exchange by using non-discretionary methods, such as algorithms, to bring together buyers and sellers.

The firm called for the SEC to take on more of a notice-and-comment rulemaking approach, rather than an exemption, which the regulator is currently considering. 

However, the Blockchain Association rejected that position, arguing that DeFi protocol developers are not brokers or dealers and don't operate an exchange and "cannot be shoehorned into the statutory categories designed for human-operated intermediaries."

"Blockchain Association respectfully urges the Commission to proceed with the innovation exemption framework that Chairman Atkins has directed staff to develop," the group said in the letter. "The Commission should grant exemptive relief for tokenized equity trading, precisely as it did for previous financial technology innovations."

Tokenization push

The letter comes as SEC Chair Paul Atkins has said the agency will soon seek public comment on a range of issues tied to future rulemaking, including a proposed innovation exemption that could function as a regulatory sandbox for onchain assets. Tokenization has gained traction as firms explore moving assets like stocks onto blockchain infrastructure, enabling faster and more efficient trading.

The SEC has greenlit several entities, including Nasdaq, to move forward with tokenized securities, while also asserting that those assets remain securities and must follow securities law.

The Blockchain Association —  whose more than 100 members include Coinbase, Circle and Mysten Labs — said securities laws regulate the intermediaries, but not "neutral infrastructure."

"Validators, autonomous smart contracts, non-custodial software, and other blockchain-based tools do not become regulated middlemen just because they help power upgraded financial rails," the group said on Monday. 

The Blockchain Association also said the SEC has previously relied on exemptions and has the authority to do so. 

"The Commission should understand Citadel’s procedural demand for what it is: a strategy of delay," the group said. "Citadel’s proposal for comprehensive rulemaking would take years. During that time, the benefits of tokenization would remain unavailable to American investors and innovation in the space would relocate to more innovation-friendly jurisdictions offshore."