Citadel Warns SEC: Tokenized Assets May Fragment Liquidity

- Citadel Securities urged the SEC to prioritize regulatory oversight of tokenized securities. - The firm emphasized that tokenization must provide genuine innovation without exploiting regulatory gaps. On July 22, 2025, CoinTelegraph, AInvest, and Mitrade reported that Citadel Securities issued a warning to the U.S. Securities and Exchange Commission (SEC) about the potential risks of tokenized securities. Citadel cautioned that if left unmanaged, the fragmented liquidity resulting from tokenization could disrupt traditional financial markets. The firm stressed that tokenization initiatives must focus on authentic innovation and operational efficiency, not on exploiting inconsistencies in existing regulations. Citadel also highlighted a key danger: creating isolated liquidity pools. These pools could exclude major institutional investors like pension funds, banks, and endowments, and this fragmentation could undermine broader market stability by siphoning liquidity from established systems. In addition, Citadel emphasized the need for a formal rule-making process to responsibly integrate tokenized securities into the financial ecosystem. The firm argued that a lack of robust regulations could lead to adverse consequences, such as diminished institutional participation and weakened market cohesion. Meanwhile, other major institutions are actively exploring opportunities in the evolving digital asset space. For example, recent reports indicate JPMorgan is developing plans to offer loans backed by Bitcoin and other cryptocurrencies. While this reflects growing institutional interest in digital assets, key challenges remain, including securing custody of digital asset collateral, managing volatility risks, and establishing robust liquidation protocols. As traditional financial entities deepen their engagement with digital assets, regulatory inadequacies remain a central concern. Citadel's warning underscores these broader apprehensions and highlights the risks that unregulated advancements in tokenized assets pose.