Coinbase, one of the leading cryptocurrency exchanges, has recently submitted a comment letter to the US Securities and Exchange Commission (SEC) expressing strong opposition to the agency’s proposal to expand the definition of “exchange” to include decentralized exchanges (DEXs). The company, along with other industry players, has voiced concerns about the potential negative impact of this proposal on innovation and compliance burdens for DEXs.
Flaws in the Proposed Rule
In the comment letter addressed to SEC Secretary Vanessa A. Countryman, Coinbase’s Chief Legal Officer, Paul Grewal, highlighted the fundamental flaws in the SEC’s proposal. The company argued that the SEC’s cost-benefit analysis is inadequate and fails to consider the unique operational characteristics of DEXs. Coinbase expressed worries about the severe economic consequences of the proposed regulations on the broader crypto market.
Coinbase’s main contention is that the SEC’s proposed expansion of the exchange definition is primarily targeted at regulating DEXs, which allow for trading in digital assets without a central intermediary. The company believes that the rule would impose unrealistic requirements on DEXs, potentially driving them out of the US market and leading to a decrease in innovation within the American financial sector.
The letter also referenced the recent Supreme Court ruling in Loper Bright Enterprises v. Raimondo, which overturned the Chevron deference and raised questions about the legality of the SEC’s proposed rule. Coinbase pointed out that courts are less likely to uphold the SEC’s attempt to extend the Exchange Act’s reach to DEXs, especially when the agency lacks sufficient information on how these decentralized platforms operate.
Coinbase criticized the SEC for basing its cost estimates on traditional centralized entities, which are fundamentally different from decentralized platforms like DEXs. The company argued that DEXs, operating without a central group of individuals, would struggle to comply with existing registration and disclosure requirements, rendering the SEC’s assumptions about compliance costs unrealistic and misleading.
Call for Withdrawal and Rethink
Coinbase is urging the SEC to withdraw the proposed rule and conduct a more thorough assessment of the economic impacts before considering further regulatory action. The exchange warned that the current proposal could result in the exit of DEXs from the US market, depriving American users of the benefits of decentralized financial systems such as transparency and lower transaction costs.
The letter requested the SEC to re-notice the rule and gather stakeholder input after acquiring necessary information. Coinbase emphasized the importance of a clear and consistent definition of what constitutes security in the digital asset market before implementing any regulations in this space.