DeFi’s Reckoning: Industry Leaders Clash with Citadel Over SEC Power Grab

The battle lines are hardening. Traditional finance's old guard wants to bring decentralized finance to heel.

The Wall Street Playbook

Citadel Securities, the market-making behemoth, lobbed a grenade into the crypto ecosystem. Their formal plea? Hand the Securities and Exchange Commission sweeping new authority to regulate DeFi protocols. Their argument hinges on a familiar refrain: investor protection and market integrity. It's a move straight from the incumbent's handbook—when innovation threatens your moat, call in the regulators.

DeFi's Decentralized Defense

The response from major DeFi advocacy groups was swift and scathing. They didn't just disagree; they framed the proposal as an existential threat. Their counter-argument cuts to the core of the technology's promise: you can't regulate a protocol like a corporation. The code is law, the governance is distributed, and the very architecture is designed to bypass centralized chokepoints. Imposing legacy frameworks, they warn, would simply stifle the most transformative financial innovation in a generation—or, more cynically, protect the profit margins of those who profit from friction.

Why This Fight Matters

This isn't a minor regulatory skirmish. It's a fundamental clash of philosophies. On one side, a system built on permission, intermediaries, and gatekeepers. On the other, a nascent world of permissionless, peer-to-peer finance. The SEC's next move could either cement the U.S. as a leader in digital asset innovation or signal a retreat, pushing development and capital offshore. The outcome will shape whether DeFi remains a radical alternative or gets neatly folded back into the very system it sought to disrupt. After all, nothing makes a Wall Street titan more nervous than a market that doesn't need titans.

SEC weighs innovation amid rising tokenization debate

The letter exchange comes as the SEC maintains that innovation can benefit capital markets. Chair Paul Atkins has emphasized the agency’s need to provide clear pathways for market participants to stay compliant with existing regulations.

Tokenization, the process of representing real-world assets like stocks and bonds onchain, has gained significant attention over the past few months. This practice still presents complicated questions and needs more attention, while regulators have signalled that blockchain technology could help modernize the U.S. financial sector.

Conflict between Citadel Securities and the crypto industry intensified after the market Maker sent a letter to the SEC last week, urging the agency to identify all intermediaries involved in trading tokenized U.S. equities. Citadel argued that decentralized trading protocols often function like exchanges or broker-dealers under existing SEC classifications.

“To conclude that there are no participants that meet the definitions of a ‘broker’ or ‘dealer’ WOULD again suggest that the technology used matters more than the services provided, and would potentially call into question the regulatory treatment of firms that have long registered with the Commission,” Citadel Global Head of Government & Regulatory Policy Stephen John Berger wrote.

Citadel’s letter prompted backlash from some in the crypto industry who referred to the market maker’s approach as “unworkable.”

Crypto advocates argue that DeFi transactions are inherently peer-to-peer, with no centralized entity controlling users’ funds. As such, applying traditional SEC registration rules could unfairly target developers and infrastructure providers who do not hold custody of users’ assets.

Addressing the SEC Advisory Committee meeting earlier this month, Jonah Platt, managing director and U.S. head of government and regulatory policy at Citadel Securities, noted that tokenization of U.S. equities could prove beneficial to investors, but said granting broad exemptions for DeFi could have negative consequences for investors.

In response to the letter on Friday, a Citadel Securities spokesperson affirmed the firm’s support for tokenization while emphasizing the importance of investor protections.

When questioned by reporters, the spokesperson said in an email that, as detailed in their comment letters, Citadel Securities strongly supports tokenization and other innovations that can reinforce America’s leadership in digital finance. Still, the individual noted that this does not require sacrificing the rigorous investor protections that have made U.S. equity markets the global Gold standard.

Tokenization and regulatory clash highlight industry tensions

The group’s Friday letter argued that “autonomous software” and “technological infrastructure” should not fall under the same category used by the SEC in its statutory definitions, since traders retain control over their own assets. “These definitions must be applied carefully to avoid inadvertently including software developers who neither hold custody of nor control users’ assets,” the letter stated.

Earlier that day, the SEC issued a no-action letter to the Depository Trust Company (DTC), allowing it to provide a tokenization service for custodied real-world assets (RWAs). Under the letter, DTC may tokenize a specific set of assets, including Russell 1000 constituents, ETFs tracking major U.S. equity indices, and U.S. Treasury bills, bonds, and notes.

Join Bybit now and claim a $50 bonus in minutes