Wall Street and Crypto Leaders Split Over How the SEC Should Regulate Tokenisation

• A meeting of the SEC’s Investor Advisory Committee involving leaders from TradFi and crypto firms has seen divergent views aired around how the regulation of tokenisation should proceed.
• Involving leaders from firms like BlackRock, Coinbase and Citadel Securities, the outcome of these talks will help to inform the SEC’s regulatory path forward on tokenisation.
• The meeting came a day after Citadel sparked anger from the crypto industry after it asked the SEC to force DeFi protocols to identify all intermediaries in trades of tokenised US equities.

As tokenization of real-world assets on distributed ledgers gains adoption among TradFi institutions, cracks are starting to appear between how crypto companies and Wall Street titans would like the industry regulated, particularly around the role DeFi should play.

At a meeting of the Securities and Exchange Commission’s (SEC) Investor Advisory Committee on Thursday, tokenisation regulation was the topic of discussion among leaders from crypto firms such as Coinbase and Wall Street firms, including BlackRock and Citadel Securities. 

Samara Cohen, BlackRock’s Senior Managing Director and Global Head of Market Development, described the meeting as “useful” with a wide range of “distinct paths and perspectives” presented by the panel’s six industry participants. 

Cohen added that the diversity of opinion reflects the difficulty of balancing the competing interests around the regulation of tokenisation, suggesting there’s “probably more than one solution.”

The meeting was significant as its outcomes will be used by the SEC to help guide the future regulation of real-world asset (RWA) tokenisation.

In SEC Chairman Paul S. Atkins’ remarks made during the meeting, he said current rules assume that securities are issued, traded and managed through intermediaries, whereas blockchain and tokenisation had the potential to streamline trading and the issuer-investor relationship.

As we modernize our rules, we must consider the full scope of these changes, both in how markets trade and in how security ownership is recorded and serviced. I welcome the IAC’s assistance in helping us think through how to respond appropriately to these innovations.

Paul S. Atkins, SEC Chair

Atkins said he was interested in the market’s views on the implications of different tokenisation models and how to manage securities transactions beyond simply issuance.

“For example, tokenized shares risk becoming nothing more than conversation pieces if their owners cannot trade them competitively in liquid on-chain environments. But making this possible requires the Commission to think carefully about how our regulatory mandate intersects with technological realities,” he said.

Related: IBIT Now BlackRock’s Highest-Grossing Product Despite $2.3B in November Outflows

Citadel Letter Calling For Tighter DeFi Regulation Sparks Angry Response

The meeting came a day after Citadel Securities sparked significant online backlash from some sections of the crypto community for submitting a letter to the SEC recommending that decentralised finance protocols should face tighter regulation around tokenisation.

In its letter, Citadel Securities called on the SEC to require that all intermediaries in the trade of US equities on DeFi protocols be fully identified and argued that DeFi protocols should not be offered broad exemptive relief from the statutory definitions of “exchange” or “broker dealer.”

Granting broad exemptive relief to facilitate the trading of a tokenized share via DeFi protocols would create two separate regulatory regimes for the trading of the same security.

Citadel letter to the SEC

“This outcome would be the exact opposite of the ‘technology-neutral’ approach taken by the Exchange Act, and would instead preference one technology over all others,” Citadel wrote. 

Hayden Adams, the founder of pioneering DeFi protocol Uniswap, hit back at Citadel’s letter on X / Twitter, saying that Citadel CEO Ken Griffin is “coming for DeFi” by “asking the SEC to treat software developers of decentralized protocols like centralized intermediaries.” 

Adams also referred to Citadel as “the king of shady tradfi market makers,” adding that it makes sense that the firm “doesn’t like open source, peer-to-peer tech that can lower the barrier to liquidity creation.”

Related: SEC Slams the Brakes on Supercharged ETFs Amid Risk Concerns

The CEO of the Blockchain Association, Summer Mersinger, also took a swipe at Citadel’s letter in a statement published on the association’s website, urging the SEC to reject what she referred to as Citadel’s “overbroad and unworkable” approach to DeFi regulation.

[Citadel’s] interpretation has no grounding in the Exchange Act, decades of Commission practice, judicial precedent, or the commonsense distinction between those who build software and those who custody assets.

Summer Mersinger, CEO Blockchain Association

“Regulating software developers as if they were financial intermediaries would undermine U.S. competitiveness, drive innovation offshore, and do nothing to advance investor protection.”

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