Tokenization debate reveals gaps in perspectives between TradeFi and crypto on decentralization during SEC panel meeting

As tokenization gains momentum, Wall Street and crypto executives revealed some potential rifts on how the Securities and Exchange Commission should regulate it and what role decentralized finance should play in it. 

On Thursday, executives from the likes of Citadel Securities to Coinbase to Galaxy discussed the topic at an SEC Investor Advisory Committee meeting. Tokenization can mean a variety of different types of assets, but it is essentially a real-world asset going on the blockchain. The panel is tasked with advising the commission on regulation and investor interests. 

Samara Cohen, senior managing director and global head of market development at BlackRock, noted the variety of perspectives during the meeting. 

She said the six-person panel proved useful given the “distinct paths and perspectives” represented, adding that the range of views reflects the challenge of the moment and suggests there is "probably more than one solution."

Thursday's meeting comes a day after some tension arose among some crypto advocates against a letter submitted by Citadel Securities on Wednesday. The giant market maker faced online backlash from some in the crypto industry for recommending that the SEC impose stricter rules on decentralized finance when it comes to tokenized securities.

Citadel Securities said the agency should fully identify intermediaries involved in the trades of tokenized U.S. equities, including decentralized trading protocols, and refrain from granting broad exemptive relief from statutory definitions of an "exchange" and "broker-dealer."

Some in the crypto industry pushed back against the TradeFi stance, and others said it was "unworkable." The industry has previously argued that generally DeFi works differently from more traditional finance, in part because there are no direct intermediaries, making it difficult to comply with the same rules.

"Let me be clear, we believe the tokenization of U.S. equities represents another promise, and has the potential to further benefit investors," said Jonah Platt, managing director and U.S. head of government and regulatory policy at Citadel Securities, on Thursday. 

However, granting broad exemptions for DeFi could have negative implications for investors, Platt added. 

"We should identify the rules that don't make sense, and we should change them," Platt later said. "But the suggestion that we should just grant blanket exemptive relief and not do that rule-by-rule analysis strikes us as very dangerous because the U.S. equity market is of such fundamental importance — we should take the time to get this right." 

Scott Bauguess, vice president for global regulatory policy at Coinbase, said he agreed on the need to go rule by rule, but said that the same rules for decentralized exchanges can't be the same for a broker. 

"You can't put regulatory obligations on a DEX, the same that exists on a broker, because if you do, you'd be asking them to take control of assets or the protocol and then introduce all he risks that don't currently exist in that environment," Bauguess said. 

Commissioners weigh in 

The investor advisory committee also met separately earlier in the day to discuss artificial intelligence and corporate governance in separate panels. SEC Chair Paul Atkins focused much of his prepared remarks on tokenization and shed light on the agency's stance.  

"If we want to boost innovation, investment, and jobs here in the United States, we must provide compliant pathways that allow market participants to leverage the unique capabilities of this new technology," Atkins said. 

Lone Democratic Commissioner Caroline Crenshaw, who will soon be leaving the SEC, raised concerns about the risks to investors and said new rules may be needed. One point of concern could be tokenized equities that are marketed as "wrapped securities," she said. 

"In truth, these tokenized products are far from a one-to-one replica of the underlying asset to which they are supposedly linked," Crenshaw said, adding that they could be less liquid and have different ownership rights.