‘Wrong approach’ – Crypto lobby rejects Wall Street’s tighter DeFi rules for tokenized securities

The DeFi sector is doubling down on its pushback against the Citadel-led call for barring decentralized protocols from blanket regulatory exemption. 

In a letter to the U.S SEC on Monday, the Blockchain Association (BA) termed Citadel’s proposed regulation of DeFi protocols handling tokenized assets as a “wrong approach.”

The BA is an advocacy and an umbrella group with key industry members, including Coinbase. In the letter, the BA rebutted, 

Securities laws regulate intermediaries. They do not automatically turn neutral infrastructure into an exchange, broker, or dealer simply because that infrastructure is part of a tokenized market.

The lobby group added that the DeFi sector is not after a “free pass.” However, it asked the SEC to consider how the underlying tech works before regulating any DeFi protocol. 

The digital asset industry is not asking for a free pass. Tokenized securities are still securities. The question is whether the SEC will apply the law in a way that reflects how modern infrastructure actually works.

Tokenized securities are an on-chain version of traditional securities, but traded via blockchain rails. 

Citadel wants everyone to play by the rules

Intriguingly, the BA’s request for the SEC to consider how “modern blockchain infrastructure design” works is what Citadel and SIFMA (broader TradFi group) are against. For the TradFi players, the SEC must ensure a level playing field through a “neutral technology” framework. 

For them, the issue is not whether a DeFi venue is custodial (controlled by the developer) or not. What’s crucial, they added, is that every platform handling tokenized securities must be under oversight just like traditional intermediaries. 

According to critics of the proposed innovation exemption, investor protections in the DeFi world, which is full of scams and rug pulls, can only be ensured by regulations. 

Last week, another crypto lobby, the DeFi Education Fund (DEF), castigated SIFMA and Citadel’s call for regulation of AMMs (automated market makers), which are deemed decentralized platforms by experts. 

It remains to be seen which route the SEC will take and whether the disgruntled side will sue the agency for its decision on the innovation exemption.

Even so, if the agency’s rulemaking or guidelines related to DeFi exemptions aren’t codified via the CLARITY Act, then they could still be disputed in court. For instance, Roman Storm, the developer behind Tornado Cash with no control over the crypto mixer, is still facing a retrial. 

Final Summary

• Blockchain Association has joined DeFi Education Fund to fend off Citadel and Wall Street’s push for regulations of decentralized protocols. 
• The DeFi lobby groups pleaded with the SEC to consider the neutral nature of decentralized protocols before attempting to regulate them.