Earlier this month, Citadel Securities issued a statement addressed to the Securities and Exchange Commission (SEC) stating that it should not grant exemptive relief regarding the definitions of an exchange or a broker-dealer for DeFi trading protocols. Citadel claimed that granting broad exemptive relief from the statutory definitions of “exchange” and “broker-dealer” for DeFi trading protocols would undermine investor protections and create a “dual regulatory regime for the same securities.” In effect, DeFi should be treated the same as broker-dealers, etc.
This week, Andreessen Horowitz, The Digital Chamber, along with The DeFi Education Fund, Orca Creative, J.W. Verret, and Uniswap Foundation, joined to criticize Citadel’s claims. The group stated that Citadel’s statement “rests on a flawed analysis of the securities laws that attempts to extend SEC registration requirements to essentially any entity with even the most tangential connection to a DeFi transaction.”
The letter states that Citadel seeks to protect entrenched incumbents who do not “embrace innovative technologies.”
The group believes that neither autonomous software or technological infrastructure are intermediaries. This holds true for the software developers who build that infrastructure. This is contingent on their not providing custody or control of user assets or performing typical brokerage activities.
The missive slams Citadel as making statements that are unsupported by law.
Included in the response to Citadel is a point-by-point counterargument to what Citadel believes.
Figure founder Mike Cagney appears to rise to the occasion, lambasting Citadel as protecting a significant revenue generator: Payment for Order Flow. Cagney stated:
“Citadel makes a lot of money paying for order flow. They pay over $1B a year for flow, so you can bet they made a lot more than that (they aren’t in the business of losing money). The problem (for Citadel) with a blockchain native equity market is that those markets trade bilaterally, with atomic settlement. I put a bid out – you put an offer out. If you lift my offer (say, through a market order), that’s the price we both get. There is no way to intermediate between buyer and seller as a market maker. That’s bad for Citadel.”
While the concept of DeFi presents nuances that many policymakers struggle with, the political winds appear to be heading in favor of digital asset innovators rather than TradFi firms. In any event, it may take an act of Congress to sort things out. Meanwhile, the SEC Crypto Task Force has become a highly effective and transparent venue for sorting out how digital assets will impact financial services.
