Citadel Cautions SEC on Tokenization Risks and Innovation

The US Securities and Exchange Commission’s (SEC) plan to streamline securities tokenization may sound promising, but it is unlikely to benefit investors unless it delivers genuine innovation and efficiency, according to market maker Citadel Securities.

“Tokenized securities must achieve success by delivering real innovation and efficiency to market participants, rather than through self-serving regulatory arbitrage,” Citadel wrote in a statement to the SEC’s Crypto Task Force, as reported by Bloomberg. 

Tokenization — the process of representing real-world assets on a blockchain with digital tokens — is often touted for its potential to reduce costs and boost efficiency by minimizing the role of intermediaries, shortening settlement times and enabling fractional ownership of financial assets. 

A December report by the World Economic Forum argued that “the benefits of tokenization in capital markets will increase exponentially as more institutions and infrastructures see the advantages for themselves.”

Major players like BlackRock and Franklin Templeton have entered the tokenization race, alongside crypto-focused platforms such as Coinbase, Robinhood and Kraken.

SEC Chair Paul Atkins has advocated for tokenization, comparing its potential impact to the evolution of audio formats. He has suggested the introduction of an “innovation exemption” to encourage its development.

Despite growing regulatory support, risks remain. Citadel cautioned that asset tokenization could “siphon liquidity” from traditional stock markets and create “new liquidity pools that are inaccessible” to key institutional investors such as pensions, banks and endowments.

Related: SEC ends ‘regulation through enforcement,’ calls tokenization ‘innovation’

Crypto adoption risks for institutions

Citadel isn’t alone in sounding the alarm about challenges traditional financial institutions face when entering the digital asset space. On Tuesday, JPMorgan made headlines amid reports that it is exploring Bitcoin-backed loans, which would allow clients to borrow against their crypto holdings.

This move marks a significant shift from JPMorgan’s historically cautious stance on crypto. However, Ledn co-founder and CEO Adam Reeds warned that traditional banks entering the market — even under more crypto-friendly regulations — will face steep challenges as non-native players.

The biggest hurdles, he noted, include “secure custody, collateral volatility, and [orderly] liquidation frameworks.”

“Bitcoin-backed lending isn’t just about holding assets; it’s about what happens when markets move fast and ensuring clients know exactly how their Bitcoin is being managed at all times,” said Reeds.

Additional challenges, such as safe self-custody, are also top of mind for institutions. In June, Circuit CEO Harry Donnelly said he developed a crypto recovery engine to address this very issue.

“The permanent loss of assets is one of the biggest barriers to mainstream adoption,” Donnelly told Cointelegraph. 

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