TLDR
- Coinbase has submitted a comment letter opposing the SEC’s proposal to expand the definition of “exchange” to include decentralized exchanges (DEXs).
- The crypto exchange argues that the SEC’s proposal is fundamentally flawed and lacks adequate cost-benefit analysis.
- Coinbase warns that the proposed rule could stifle innovation and impose unworkable compliance burdens on DEXs.
- The company cites the recent Supreme Court ruling in Loper Bright Enterprises v. Raimondo as potentially limiting the SEC’s authority in this matter.
- Coinbase calls for the SEC to withdraw the proposed rule and conduct a more thorough assessment before considering further regulatory action.
Coinbase has taken a firm stance against the Securities and Exchange Commission’s (SEC) proposal to redefine “exchange” to include decentralized exchanges (DEXs).
In a strongly worded comment letter, the company argues that the SEC’s approach is fundamentally flawed and could have far-reaching negative consequences for the cryptocurrency industry.
The SEC’s proposal, which was first introduced in 2022 and has since reopened for public comment, aims to bring DEXs under the regulatory umbrella by expanding the definition of what constitutes an exchange.
However, Coinbase contends that this move fails to account for the unique operational characteristics of DEXs and could impose “anachronistic and impossible-to-satisfy requirements” on these platforms.
Paul Grewal, Coinbase’s Chief Legal Officer, authored the letter addressed to SEC Secretary Vanessa A. Countryman.
He emphasized that the SEC’s cost-benefit analysis is inadequate, as it does not properly consider the potential economic impacts on the broader crypto market. Grewal argued that the SEC lacks crucial information to conduct a proper analysis, including a clear definition of “crypto asset security” and accurate data on the number of exchanges operating in the market.
One of the primary concerns raised by Coinbase is that the proposed rule could force DEXs out of the U.S. market entirely. This exodus could significantly reduce innovation and competitiveness within the American financial sector, potentially driving developers and businesses to move their operations offshore.
The company warns that such a scenario would deprive American users of the benefits associated with decentralized financial systems, such as enhanced transparency and lower transaction costs.
Coinbase also highlighted the recent Supreme Court ruling in Loper Bright Enterprises v. Raimondo, which overturned the Chevron deference. This legal precedent, according to Coinbase, diminishes the likelihood of courts upholding the SEC’s attempt to extend the Exchange Act’s reach to DEXs, especially given the agency’s admitted lack of information on how these platforms operate.
The crypto exchange criticized the SEC for basing its cost estimates on traditional, centralized entities, arguing that these are fundamentally different from decentralized platforms. DEXs, which operate without a centralized group of persons, cannot comply with existing registration and disclosure requirements, making the SEC’s assumptions about compliance costs both unrealistic and misleading.
Grewal pointed out the impossibility of the SEC meeting its statutory and procedural obligations to regulate based on the best available information when the agency itself admits to having little or no information on many key issues. This lack of foundational knowledge, Coinbase argues, renders any cost-benefit analysis inherently flawed.
The company is not alone in its criticism of the SEC’s proposal. The Blockchain Association and Republican members of the House Financial Services Committee have also filed comments opposing the proposed rule change.
DEX Uniswap suggested in a July comment that the U.S. Supreme Court’s June Chevron decision implies that the SEC was proposing the new definition against “a legal backdrop that no longer exists.”
In light of these concerns, Coinbase is calling for the SEC to withdraw the proposed rule and conduct a more thorough and rational assessment of the economic impacts before considering any further regulatory action.
The exchange emphasized the need for any regulation in this space to be based on a clear and consistent definition of what constitutes a security in the digital asset market, a determination the SEC has yet to make.
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