Coinbase recently submitted a comment letter to the US Securities and Exchange Commission (SEC), where it highlighted significant flaws in the agency’s cost-benefit analysis of the proposed rule. The crypto exchange argued that the SEC has not adequately evaluated the rule’s economic impact on efficiency, competition, and capital formation. Despite recognizing a lack of crucial information on decentralized exchange (DEX) operations and compliance costs, Coinbase believes that the SEC’s proposed benefits are too vague and may not materialize, especially if DEXs are driven out of the US market.
Paul Grewal, Coinbase’s chief legal officer and the author of the letter, suggested that the SEC should withdraw the proposal and conduct more thorough research before reintroducing it. The letter criticized the SEC for failing to gather essential information on DEXs, admitting gaps in understanding their operation, and making unjustified assumptions based on non-DEX entities. Coinbase argued that the regulatory entity’s approach is arbitrary and irrational, as DEXs operate fundamentally differently and would face significant compliance costs.
One of Coinbase’s key concerns is the SEC’s inconsistent approach to classifying digital assets as securities. The agency’s reliance on case-by-case litigation rather than clear rules has created uncertainty for industry participants and courts. Coinbase stated that the proposed changes exacerbate this uncertainty by ambiguously stating that digital assets may or may not be securities. The lack of clarity undermines the reliability of the SEC’s cost-benefit analysis, according to Coinbase.
Coinbase also highlighted the negative impact of the proposed rule on its services, such as the Base network and wallet offerings. By potentially pushing DEXs out of the market, the rule would disproportionately affect smaller exchanges with higher compliance costs, giving larger incumbents an unfair advantage. The vague language used in the proposal adds to the compliance burden for industry participants. While the SEC has acknowledged assessment costs in the past, it seems to have overlooked them in this instance, casting doubt on the validity of the rule’s cost analysis.
Coinbase’s critique of the SEC’s proposed rule on digital assets raises important concerns about the agency’s cost-benefit analysis, regulatory approach, and the potential impact on the cryptocurrency industry. The letter calls for a more thorough assessment of the rule’s economic impact and a clearer classification of digital assets to reduce uncertainty and ensure fair competition in the market.