- Citadel Securities has urged the US SEC to proceed more slowly on allowing tokenized securities.
- The firm warns that a rushed approach could lead to investor confusion and “self-serving regulatory arbitrage.”
- Citadel argues tokenization should advance through a formal rule-making process, not ad-hoc measures.
Citadel Securities, one of the world’s most influential market-making firms, is calling on the US Securities and Exchange Commission (SEC) to adopt a more cautious and deliberate approach to the burgeoning field of “tokenized” securities.
The firm has warned that a hasty embrace of this new technology could lead to investor confusion and create an uneven playing field for traditional exchanges and publicly traded companies.
This call for a go-slow approach comes as SEC Chairman Paul Atkins has recently spoken about streamlining traditional securities rules to make it easier for companies to offer tokenized securities.
A tokenized security is a digital representation of a traditional asset, like a stock, that can be traded on a blockchain network rather than through a conventional brokerage account.
By digitally dividing assets into smaller pieces, tokenization can make high-value stocks and other investments more affordable and accessible to a wider range of investors.
In a comment letter sent on Monday to the SEC’s Crypto Task Force, Citadel Securities argued that the race to innovate should not come at the expense of market integrity.
“Tokenized securities must achieve success by delivering real innovation and efficiency to market participants, rather than through self-serving regulatory arbitrage,” the market-making firm stated in its letter.
Instead of allowing tokenization to advance through ad-hoc measures or interpretations of existing rules, Citadel Securities insists that the SEC should move forward only through a formal, comprehensive rule-making process.
When asked for a response, an SEC spokesperson said the agency declined to comment “beyond what the chairman had said publicly on this topic.”
The promise and peril of tokenization
Proponents of tokenizing popular stocks and other assets argue that putting them on a blockchain could unlock a host of benefits, including the potential for 24/7 trading, instantaneous settlement of transactions, enhanced liquidity, and the ability for investors to easily purchase fractional shares of nearly any tokenized asset.
While, in theory, almost anyone could tokenize shares, the greatest interest in doing so comes from the asset issuers themselves or from digital asset platforms, who would then offer these tokens to their investors.
However, Citadel Securities has raised concerns about the potential unintended consequences of such a move. The firm urged the SEC to carefully consider how a rapid expansion of tokenization might further deflate an already sluggish market for Initial Public Offerings (IPOs) by giving privately held companies yet another alternative to raise capital outside of the traditional public markets.
Siphoning liquidity and creating inaccessible pools
A key concern highlighted by Citadel Securities is the potential for tokenization to fragment the market and “siphon liquidity away” from established, regulated equity markets. This could lead to the creation of “new liquidity pools that are inaccessible” to many institutional players.
Firms like pension funds, endowments, banks, and other fiduciaries often have strict risk management policies or legal obligations that would prevent them from participating in these new, less-regulated blockchain-based markets.
This development, which has garnered support from digital asset exchanges like Coinbase Global Inc. and Robinhood Markets Inc., is unfolding at a time of significant change in the digital asset landscape. SEC Chairman Paul Atkins has spoken broadly about his support for innovation in financial markets, a stance that includes the burgeoning digital assets industry.
This industry recently celebrated its first major regulatory victory last week with the enactment of landmark stablecoin legislation. Stablecoins, digital assets tied to the US dollar or other low-volatility assets, are primarily intended to be used to facilitate payments, but their successful regulation is seen as a stepping stone for broader digital asset rules.
Citadel’s letter serves as a powerful reminder of the complex challenges that lie ahead as regulators grapple with integrating these new technologies into the traditional financial system.
