Citadel Challenges SEC's Tokenized Stock Exemptions Warns of Liquidity Destabilization and Investor Clarity Risks

Citadel Securities has launched a formal challenge to the U.S. Securities and Exchange Commission’s (SEC) proposed regulatory exemptions for tokenized stocks, warning that such measures could destabilize traditional market liquidity and investor clarity. In a July 23, 2025, letter to the SEC, the firm argued that exemptions for blockchain-based securities risk creating fragmented trading systems and undermining institutional access to core market infrastructure. The firm’s position, which has garnered support from SEC Commissioner Hester Peirce, highlights a growing divide within the financial sector over the pace and scope of tokenization regulation.

Citadel, a major market maker, emphasized that regulatory loopholes for tokenized assets could enable “regulatory arbitrage” rather than genuine innovation. Stephen Berger, the firm’s Global Head of Government & Regulatory Policy, stated that exploiting gaps in existing rules for “look-a-like” securities does not align with technological progress. The firm’s stance has drawn backing from industry peers like SIFMA and Charles Schwab, who also urged the SEC to avoid piecemeal regulatory changes. The coalition’s argument centers on the potential for tokenized stocks to divert capital from traditional public markets to decentralized ecosystems, complicating compliance for investors and institutions.

Commissioner Peirce, a vocal advocate for blockchain innovation, publicly aligned with Citadel’s concerns, stressing that tokenized securities must adhere to existing regulatory frameworks. SEC Chairman Paul Atkins, meanwhile, acknowledged the agency’s ongoing evaluation of an “innovation exemption” mechanism but did not specify timelines. The agency’s deliberations have sparked broader debate about balancing innovation with market stability. Critics of rapid exemptions warn that unregulated tokenization could fragment liquidity, erode transparency, and create systemic risks for institutional players reliant on centralized exchanges.

Citadel’s position reflects broader industry caution about the unintended consequences of tokenization. The firm highlighted risks such as compliance complexities for investors, potential declines in IPO activity, and volatility spikes on crypto-native exchanges if exemptions are approved. It also called for tailored adjustments to regulatory requirements—such as disclosure and custody rules—to address the unique features of blockchain-based assets, including 24/7 trading and programmable execution. This approach, Citadel argued, would preserve market integrity while accommodating innovation.

The debate underscores a critical tension in financial regulation: the push for rapid adoption of blockchain technology versus the need to safeguard established market mechanisms. While some industry players advocate for experimental frameworks to accelerate tokenization, Citadel’s measured approach emphasizes the importance of aligning innovation with proven guardrails. The firm’s interventions have positioned it as a key player in shaping the SEC’s regulatory strategy, with implications for how tokenized stocks integrate into the broader capital markets.

As the SEC continues its review, the outcome could determine whether tokenization evolves as a complementary tool for market efficiency or risks creating parallel systems that fragment liquidity and erode trust. Citadel’s advocacy for a balanced framework reflects its broader role as a bridge between disruptive technology and institutional market stability. With global regulators increasingly scrutinizing digital assets, the agency’s final decision may set a precedent for how tokenized securities are governed in the years ahead.