Citadel pushes SEC to regulate DeFi protocols as exchanges

In a detailed letter to the SEC’s Crypto Task Force, dated July 21, 2025 and highlighted this week, the Chicago-based market maker argued that DeFi platforms handling tokenized U.S. equities, along with the developers and interfaces around them, already meet long-standing legal definitions of securities intermediaries. The firm warned that granting broad exemptions to such systems would create a “dual” regime for trading the same stocks on traditional venues and on-chain protocols, undermining principles such as fair access, best execution and pre- and post-trade transparency.

Citadel’s letter responds to an SEC request for feedback on how to treat tokenized equity securities – traditional U.S. stocks issued or mirrored on a blockchain – and the DeFi protocols that enable their trading. The firm told the agency it should fully map out all entities involved in these trades, including automated market makers, front-end trading interfaces and even some wallet providers, and then apply existing securities rules wherever they function like exchanges or broker-dealers by matching orders or collecting transaction-based fees.

The company stressed that it does not oppose tokenization itself, but objects to what it describes as regulatory “arbitrage” around equity-like products. In the letter, Citadel said tokenized U.S. equities “clearly fall within the definition of a ‘security’” and argued that using a blockchain should not be a path to weaker oversight. It urged the SEC to keep a “technology-neutral” approach in which the same stock faces the same regulatory safeguards, regardless of whether it trades on a centralized exchange or via smart contracts on a public network.

Instead of relying on broad exemptions or informal guidance, Citadel called on the SEC to use formal notice-and-comment rulemaking to update specific rules where necessary to account for operational details of tokenized securities, while keeping core investor protections intact. The firm also echoed concerns raised earlier this year by traditional securities industry groups that fear a fragmented framework could erode transparency in U.S. equity markets and redirect liquidity into structures that are less accessible to pensions, endowments and other large institutions.

The letter immediately drew criticism from prominent DeFi advocates. Uniswap founder Hayden Adams argued that it was unsurprising a major high-frequency market maker would take issue with open-source, peer-to-peer systems that lower barriers to providing liquidity. In a social media post, he said it “makes sense” that a dominant traditional market-making firm is uncomfortable with technology that allows anyone to compete in market-making without relying on centralized intermediaries.

Jake Chervinsky, a lawyer and board member of the Blockchain Association, framed the filing as predictable resistance from an incumbent that profits from existing market structure. He argued that the letter illustrates how some large firms seek to maintain fees and control by ensuring that new technologies must fit into legacy rules designed around traditional intermediaries.

Summer Mersinger, CEO of the Blockchain Association, warned that treating software developers as if they were regulated financial middlemen would have wider consequences than the tokenized-stock niche. She said that “regulating software developers as if they were financial intermediaries would undermine U.S. competitiveness, drive innovation offshore, and do nothing to advance investor protection,” and urged the SEC to focus on entities that actually stand between customers and their assets, not the authors of open-source code.

At the heart of the dispute is how far securities law should reach into DeFi architecture. Citadel’s submission argues that many on-chain trading systems already satisfy the statutory definition of an “exchange” because they use non-discretionary methods – often algorithmic order-matching – to bring together buyers and sellers. It also says some DeFi actors, including trading front-ends, smart contract operators and liquidity providers who earn protocol fees, can function like broker-dealers by collecting transaction-linked compensation, and therefore should face similar obligations.

DeFi advocates counter that properly non-custodial protocols do not “stand in the middle” of trades in the way traditional intermediaries do, and that imposing full exchange or broker-dealer registration on open-source software projects would be unworkable. They point to recent court decisions that declined to treat protocol developers as liable for all activity on their systems, and argue that conflating software publication with financial intermediation could chill experimentation in areas that have nothing to do with tokenized U.S. equities.