BrandonMFarley

Citadel are in panic mode over stock tokenization Last week, Citadel issued a letter urging the SEC to “tread cautiously” with tokenization link to letter: sec.gov/files/citadel-… CNBC attempted to probe into Ryan Cohen’s plans on tokenization in their interview, but were quickly shut down by the GameStop CEO. The $GME share price has been suppressed heavily recently, with 80%+ of daily trades routed through dark pools to avoid organic price discovery on the lit markets. Citadel are scared of the tokenization button being pushed, here are some insights into their letter to the SEC. Citadel uses this letter in an attempt to position itself as a "champion of regulation and transparency" despite facing a $7 million SEC fine in 2023 for order mismarking violations that directly relate to short selling practices: cnbc.com/2023/09/22/sec… Citadel Securities urges the SEC’s Crypto Task Force to treat tokenized U.S. equities (new “look-a-like” securities issued on blockchains) as fully subject to existing securities laws rather than granting broad exemptions. While acknowledging that limited technical accommodations may be needed to address blockchain-specific features, Citadel warns against self-serving attempts to bypass core rules and emphasizes that real innovation must come from improvements in market efficiency, not regulatory arbitrage. Citadel processes approximately 47% of all U.S.-listed retail volume and want to retain their dominance in the settlement markets, tokenization is a threat to their business model. Several of Citadel’s “public-interest” recommendations would keep tokenized U.S equities inside today’s opaque, centralized clearing structure, exactly the environment that allowed its 2015-2020 Regulation SHO mismarkings and other naked-short-related controversies to go undetected. By rejecting real-time, on-chain settlement (the accountability model Overstock adopted with its tZERO blockchain dividend) Citadel preserves market practices that can obscure share inventory and delivery-fail data. Here are the recommendations made in the letter, with the self-serving benefits they provide to naked short selling and malpractice under the guise of concern and transparency: Recommendation A Require tokenized-equity trading venues to register as full national securities exchanges, not ATS “sandboxes,” and undergo the full rule-filing, cybersecurity and fair-access regime Why this is self-serving Exchange registration demands multimillion-dollar compliance infrastructure already built by Citadel’s preferred partners; it discourages lightweight blockchain venues that could clear and settle continuously on-chain. Potential Impact on Naked Short Selling practices Forces tokens back into the DTCC/NSCC settlement loop where fails-to-deliver are netted and obscured, reducing the ledger-level visibility that real-time token settlement would provide. Recommendation B Reject all “broad exemptive relief” and treat tokens as traditional equities subject to T+2 net settlement and Section 31 fee funding Why this is self-serving Maintains the same batch-settlement timetable that regulators cite as fertile ground for naked shorts (locate failures can be hidden for two days). Potential Impact on Naked Short Selling practices Prevents atomic, delivery-versus-payment settlement that would immediately expose unlocated shares, the mechanism tZERO designed to “box in” naked short sellers Recommendation C Insist that blockchains are “not a substitute” for the consolidated tape and cannot provide real-time post-trade data Why this is self-serving Undermines the core transparency advantage of tokenization; an immutable ledger of every share. Potential Impact on Naked Short Selling practices Keeps regulators and investors dependent on broker-dealer blue-sheet data, the very data Citadel "accidentally" mismarked for five years, obscuring millions of short-sale orders. Recommendation D Emphasize margin frameworks and close-out rules within existing broker-dealer pipes rather than on-chain collateral management Why this is self-serving Leaves Citadel’s wholesale market-making business in control of locate services and buy-ins, revenue streams threatened by blockchain-based “Digital Locate Receipts” like tZERO’s. Potential Impact on Naked Short Selling practices Continues the practice whereby brokers can delay or partially locate shares, a key enabler of naked short selling. Recommendation E Citadel argue that tokenized equities issued by third parties will “siphon liquidity” and create “counterparty credit risk” Why this is self-serving Frames innovative token issuers as risky while ignoring that Citadel’s own order-flow internalization concentrates liquidity. Potential Impact on Naked Short Selling practices Discourages issuers from exploring token dividends (e.g., Overstock’s OSTKO) that force reconciliation of share counts and trigger short squeezes when excess synthetic shares exist Several policy demands in Citadel’s submission, portrayed as investor-protection steps would lock tokenized equities into the same centralized structures where mismarked or undelivered shorts can hide, erect high compliance costs that deter novel, transparent blockchain venues, and deflect momentum toward real-time share-inventory reconciliation. Citadel fear accountability. Given Citadel’s recent Regulation SHO infractions and its dominant role in retail order flow, the firm has clear incentives to resist a tokenized framework that could make every locate, borrow and fail-to-deliver visible in real time. Citadel’s surface level regulatory Virtue Signalling within this letter is pretentious, and the embedded concerns around settlement obligations is the real concern they have with stock tokenization.