Trading Fire: Coinbase vs Citadel

Crypto and TradFi fight over the US SEC's adopting a laissez-faire approach to DeFi, with global implications.

Financial regulators around the world have founds ways to suborn digital assets into recognizable laws because they have agreed on the principle of technological neutrality. It doesn’t matter if the rails are on blockchain: as the Hong Kong securities regulator puts it, “same business, same risks, same rules” is the fundamental principle.

This comfortable consensus could by fractured by the US, where the crypto industry sees an opportunity for material reinterpretations of how, or even whether, it should be subject to financial regulation.

In January 2025, the SEC established a Crypto Task Force to decide when and how crypto assets count as securities, and how or whether venues and intermediaries must register. The big policy choices include whether to treat DeFi protocols as exchanges, whether tokenized stocks can trade on alternative infrastructures with exemptions, and how broker-dealers can custody and intermediate crypto securities.

The task force’s ostensible mission is to replace the SEC’s enforcement-based approach to crypto with one based on rules and guidance. It is chaired by Commissioner Heather Pierce, a pro-crypto bureaucrat. The SEC’s approach to use its rule-making and exemptive powers, as granted under the Exchange Act of 1934, could have a major impact on regulating crypto, especially if the SEC seeks amendments by Congress to the Act itself.

Recently, large crypto and financial institutions have filed opinions and arguments with the SEC. Two worth noting, as they encapsulate the division between crypto and traditional finance, are by the exchange Coinbase, and equities broker and market maker Citadel Securities. Their views are diametrically opposed on these questions.

Although this is a battle within the US, its outcome will impact regulators and the institutions they supervise everywhere.

Task Force

As part of this effort, the SEC has solicited views from industry. Many in the crypto and technology space are advocating for radical changes, while financial institutions are fighting to keep crypto within traditional regulation.

First, though, we should note what the SEC could do once its Task Force distills these ideas into recommendations. It can:

• Provide guidance on how existing laws apply to crypto assets, including how it interprets the meaning of a security.

• Amend its own rules around governing crypto asset securities, including registration, disclosure, market structure, and definitions.

• Grant exemptions or issue no-action letters that suggest its officers won’t enforce rules related to specific industry business proposals. The SEC can also change how it prioritizes its enforcement resources, meaning it could look the other way in the face of technical violations.

The SEC does not have carte blanche to rewrite securities laws. It can’t redefine ‘security’ or carve large swathes of the crypto industry out of securities law. It can’t invent sweeping safe harbors or new registration categories, or ignore other federal or state regulators.

But the SEC can substantially influence how aggressively it applies existing laws to crypto, broaden its exemptions, and lobby the US Congress to legislate changes. The SEC hasn’t provided a timetable for its Crypto Task Force, but 2026 is likely to see it evolve from research to policy proposals.

The Coinbase Opinion

Coinbase’s submission, which it calls its “blueprint”, calls for a radical departure from the global trend of plugging tokenized securities into conventional securities law, with significant implications were the SEC to codify this into statute.

Coinbase is a leading example of the full-stack, vertically integrated, centralized crypto exchange. It urges the SEC to develop a dedicated digital-asset framework with a revised scheme for clarifying assets, disclosures, and pathways for decentralized networks to transition out of securities regulation.

It calls for recognizing public, permissionless blockchains have features that don’t fit within the broker-dealer, exchange, and clearing-agency silos designed for traditional intermediated markets. These features include atomic settlement, composability, and the vertical integration of trading, clearing, and custody – which is to say, Coinbase doesn’t want the traditional tradfi safeguards such as mandated third-party custody or distinctions between an agent and a principal.

Were the SEC to accept such views, it would lead to a fundamental redesign of regulation towards market structure around crypto. It would preserve crypto’s centralized model of vertically integrated platforms that combine matching, settlement, and custody. It would also force regulators to accommodate on-chain atomic settlement instead of forcing crypto markets to align with T+2 settlement times (transitioning to T+1 in the US) and existing clearing-agency models.

Coinbase also advocates for flexible treatment of protocol developers, validators, and other ecosystem actors, arguing they should not automatically be deemed intermediaries or broker-dealers merely because they contribute to or maintain the underlying infrastructure.

It is pressing the SEC for a new classification scheme in which:

• The SEC should have no jurisdiction over crypto commodity or utility tokens, and should grant explicit safe harbors or permissive rules for other protocol-level activities such as staking and governance tokens.

• Disclosure and trading rules should be tailored to meet crypto securities tokens.

• The SEC should allow certain ‘decentralizing’ tokens (tokens that begin life as securities but are meant to morph into governance tokens as projects become broad, permissionless systems, such as when a DAO becomes truly decentralized).

Other Crypto Views

Coinbase is not the only firm pushing for big changes in how the SEC regulates crypto. Indeed, Coinbase’s filing is probably the most ‘moderate’ from the industry, given its role as a centralized crypto exchange that resembles a traditional financial institution (it’s also listed on Nasdaq).

Indeed, for the crypto industry, much of Coinbase’s suggests are table stakes: a bespoke framework and taxonomy, safe harbors, and a dilution of the SEC’s historical enforcement by litigation, so that the cultural change survives a change in administrations. But that’s not all they’re lobbying for.

The Proof of Stake Alliance, a US industry advocacy group, wants the SEC totally out of regulating staking and staking-as-a-service, which it argues do not count as investment contracts under the Howey test (the SEC’s rules of thumb to determine what constitutes a security). Coinbase acknowledges some staking conditions fall under regulated activities but wants these clarified.

The VC firm a16z is arguing for a broad carve-out for NFTs, airdrops, and reward schemes for any token deemed a ‘collectible’. This interpretation apply blanket exemptions to entire swathes of crypto activity from securities law.

Still other crypto players want the SEC to steer clear of many aspects of DeFI, including front ends, open-source developers, and base-layer validators. If the SEC is to have a role, it is to affirm protections for permissionless systems – from regulation.

Citadel’s Submission

Traditional financial institutions are also making their views known to the SEC. A prominent example is a recent filing by Citadel Securities, which attacks the idea of exempting tokenization of real-world assets and DeFi trading from securities regulation.

Citadel argues that were the SEC to grant broad exemptive relief from the statutory definitions of ‘exchange’ and ‘broker-dealer’ for DeFi protocols that trade tokenized US equities, it would undermine investor protections and create a dual regulatory regime for the same securities.

In this view, developers, wallet providers, and automated market makers already meet legal definitions of exchanges or broker-dealers. Therefore, they should comply with the existing rules. Similarly, the tokenization of equities should fall within the established framework for stocks, including principles of fair access, surveillance, and post-trade reporting. If the SEC does want to make changes to accommodate blockchain finance, then, says Citadel, it should do so in a public, industry-wide manner rather than make ad hoc exemptions.

Citadel’s submission says trading protocols that call themselves ‘DeFi’, including those that identify as decentralized exchanges, are nonetheless financial institutions. They bring together buyers and sellers for securities when facilitating the trading of tokenized US equities, which Citadel says meets the definition of an “exchange”.

To broadly exempt them from regulation would mean the SEC says the technology used matters more than the purpose of the trading functionality. This, of course, is the bedrock of regulation worldwide for digital finance. Citadel says this principle applies not just to centralized crypto actors but also DeFi trading protocols, foundations, liquidity providers, and trading apps that update code and smart contracts, set the rules, engage in marketing, and facilitate transactions.

Otherwise, Citadel warns, the SEC would encourage the development of a shadow equities market, and fragment liquidity. This would represent a fundamental shift from previous trends in US regulation that created equal pricing and best execution across its multiple stock markets.

Citadel says exempting crypto systems from regulation would:

• Undermine market transparency around things like conflicts of interest, access, and order handling.

• Leave reporting executed trades to a public blockchain up to DeFi validators or trading systems, as opposed to the immediate post-trade reporting of stock exchanges and automated trading systems to the market-wide consolidated tape; similarly there would be no published information to enable investors to compare execution quality.

• Increase cybersecurity risks because unregistered DeFi systems wouldn’t comply with the standards applied to stock exchanges.

• Allow non-compliant or illicit protocols because unregistered trading systems aren’t required to monitor for manipulative trading activity.

• Raise the risk of a systemic crisis, as unregistered DeFi trading systems wouldn’t need to maintain a minimum level of capital, or enforce controls such as volatility limits and trading halts to protect against dramatic swings, such as the $19 billion meltdown in crypto markets on October 10.

From a market-structure perspective, Citadel is defending a ‘technology-neutral’ reading of the US Exchange Act of 1934 – the same principles adopted by regulators internationally. Citadel argues this extends to DeFi, where user interactions with smart contracts and front ends are no different to such interactions with traditional intermediaries, and so these DeFi players face similar obligations.

It also supports the existing classification of securities, ie the Howey and Reves tests. If a token represents a share of Apple or an ETF interest, it should inherit all the rights and regulatory protections of the underlying security, regardless of whether it trades on-chain or off-chain.

Global Impact

In most jurisdictions other than the US, regulators largely cohere around the principle of “same business, same risks, same rules” for tokenzied securities and core exchange/broker functions. They don’t offer broad exemptions for tokenized equities and DeFi venues. But there are some nuances worth mentioning.

Flexible: United Arab Emirates

The most crypto-friendly regimes are found in the United Arab Emirates, but even here, the rules broadly accept a traditional regulatory approach to crypto.

Dubai’s Virtual Asset Regulatory Authority was established as a dedicated regulator of virtual assets, not as a ‘financial’ regulator. It has its own licensing categories, along with standards for risk, conduct, and security that are comparable to those of a financial regulator’s, but not identical. It is also developing a compact with UAE’s federal Securities and Commodities Authority that would put tokenized securities within the remit of traditional-looking regulation.

Abu Dhabi Global Markets has retrofitted its financial regulations to embrace digital securities as either securities or commodities. Although it makes room for DAOs, stablecoins, and other manifestations of blockchain finance, ADGM does so as a financial regulator.

In theory these regimes that are flexible, and may well follow an American lead to remain globally competitive. The traditional financial sector is less well developed in the UAE whereas the government is very pro-crypto, with sovereign wealth funds making substantial investments into bitcoin and other tokens.

But there’s also a limit. VARA doesn’t operate in a bubble. It would have to ensure new rules are compatible with the SCA. Were the US to dramatically exempt crypto from regulation, VARA and other UAE regulators would have a thorny job of reconciling different approaches.

Nuanced: Singapore, Japan, and the EU

That is even more true for other jurisdictions. However some places already make a distinction between tokens for payment or utility, and those that are securities. In this way, they already align to a degree with Coinbase’s blueprint for non-securities tokens and for vertically integrated crypto platforms. But that alignment ends when it comes to carveouts from securities laws.

In Singapore, the Monetary Authority treats crypto through the lens of its Payment Services Act, which affords different treatment for payment tokens, but not for tokens that are capital-markets products. MAS recognizes that payment-token exchanges might need a different prudential and market-structure toolkit than securities exchanges.

Japan makes a similar distinction. Security tokens representing investment interests, such as tokenzied real-estate schemes, are deemed ‘electronically recorded transferable rights’, subject to traditional disclosure, registration and solicitation rules. Japan also offers targeted exemptions for capital-market tokens, but these are extensions of the same exemptions that exist under traditional law, not crypto-specific exceptions.

The EU splits regulation for crypto assets that are financial instruments (handled under MiFID II and a DLT Pilot Regime) and that are not (handled under MiCA). MiCA creates an EU-wide licensing and conduct regime for crypto-asset service providers, including operators of trading platforms, dealers, and custodians. These rules mirror traditional rules for investments and payments. The DLT Pilot Regime offers some carveouts for blockchain-based infrastructure providers, including systems for trading and settlement. The EU is weighing proposals to turn these sandboxed activities into broader deployment for issuing tokenized securities, but still based on traditional securities law.

“Same rules”: Hong Kong, UK, Australia

Hong Kong requires virtual-asset trading platforms offering security tokens to obtain licenses and meet comprehensive requirements on onboarding, custody, insurance, market surveillance, and internal controls.The SFC explicitly rejects a separate, lighter regime for tokenized securities; instead it has added requirements for smart-contract risks, cybersecurity, and custody structure.

The UK has moved from a mainly AML-focused oversight of crypto to a fuller conduct and prudential regime, under the narrative of “same risk, same regulatory outcome”. The Financial Conduct Authority has deemed existing collective-investment scheme rules are sufficient to support tokenized unit-holder registers and tokenized asset holdings. The Bank of England says the same regarding its payment rules and stablecoins.

Australia’s Treasury is currently consulting the industry about how to ‘map’ crypto assets onto existing concepts of financial products and services under its Corporations Act. The expectation is that tokenization providing investment or risk-management functions will be shoehorned into existing rules, even if it designs specific licensing for crypto service providers.

US Leadership or Isolation?

The upshot is that the rest of the world treats tokenized securities as ordinary securities under existing frameworks. They often allow experimentation but within regulatory sandboxes. They don’t believe in broad carveouts or relief simply because technology has changed. Many regulators are, as per Coinbase’s blueprint, trying to build more precise taxonomies of crypto assets. But it’s more about deciding which regime is applicable, and identifying where some incremental tweaks are merited. None is considering wholesale redesigns of securities laws or broad safe harbors for decentralization.

If the SEC or Congress embrace Coinbase’s vision, and enshrine a bespoke digital-asset framework with broad safe harbors into US law, the US would become an outlier. US tokenized equity platforms and DeFi protocols would enjoy clearer, more permissive conditions for operating on public blockchains. This would be especially true of vertically integrated centralized exchanges.

This would be a magnet for liquidity and talent, creating a massive regulatory arbitrage against jurisdictions that require a full exchange/broker-dealer treatment, including Abu Dhabi, Australia, the EU, Hong Kong, Japan, and the UK.

Traditional financial institutions would also have to rethink their strategies. If DeFi is enabled to compete without the same safeguards, then banks and asset managers will naturally shift as much of their business to tokenization, in order to enjoy the same lack of regulation. They would also transfer even more activity to the US and other jurisdictions with a similar hands-off approach.

Other regulators might have to surrender their principle of “same business, same risks, same rules”. They will be tempted.

On the other hand, if the US SEC and Congress really does go all-in on the Coinbase side of this debate, it is likely a recipe for chaos. Citadel’s warnings about investor protection, liquidity fragmentation, shadow markets, and uneven treatment of comparable assets, are more likely than not to manifest.

This gives the rest of the world a choice, or perhaps a spectrum of movement between one extreme of caving in on guiding principles and another extreme of coordinating to erect a barrier around the US digital-asset market. Along that spectrum, fragmentation, regulatory arbitrage, and vulnerabilities to cyberattacks is even more likely.