Coinbase opposes SEC proposal to redefine exchanges to include DEXs Coinbase opposes SEC proposal to redefine exchanges to include DEXs
The SEC's proposal, which has reopened for public comment, has drawn significant criticism from Coinbase and other industry players.
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Updated: Aug. 12, 2024 at 9:46 pm UTC
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Coinbase has submitted a strongly worded comment letter to the US Securities and Exchange Commission (SEC) opposing the agency’s proposal to expand the definition of “exchange” to include decentralized exchanges (DEXs).
The SEC’s proposal, which has reopened for public comment, has drawn significant criticism from Coinbase and other industry players. The exchange’s letter highlighted concerns that the rule could stifle innovation and impose unworkable compliance burdens on DEXs.
Fundamentally flawed
In the letter addressed to SEC Secretary Vanessa A. Countryman, Coinbase Chief Legal Officer Paul Grewal argued that the proposed rule is fundamentally flawed in both its conception and execution.
The letter emphasized that the SEC’s cost-benefit analysis is inadequate, as it fails to account for the unique operational characteristics of DEXs and the potentially severe economic impacts 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 aimed primarily at regulating DEXs, which facilitate trading in digital assets without a central intermediary. The company asserts that the rule would impose “anachronistic and impossible-to-satisfy requirements” on DEXs, potentially driving them out of the US market entirely.
The exchange further warned that this could lead to a significant reduction in innovation and competitiveness within the American financial sector, as developers and businesses may be forced to move their operations offshore.
The letter also highlighted the recent Supreme Court ruling in Loper Bright Enterprises v. Raimondo, which overturned the Chevron deference and further questioned the legality of the SEC’s proposed rule.
Coinbase pointed out that the ruling diminishes the likelihood of courts upholding the SEC’s attempt to extend the Exchange Act’s reach to DEXs, especially when the agency itself admits to lacking sufficient information on how DEXs operate.
Moreover, the exchange criticized the SEC for basing its cost estimates on traditional, centralized entities, which the company argued are fundamentally different from decentralized platforms.
It added that 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.
Call to withdraw
Coinbase is calling for the SEC to withdraw the proposed rule and to conduct a more thorough and rational assessment of the economic impacts before considering any further regulatory action.
The exchange warned that the rule, as currently proposed, would likely lead to the exit of DEXs from the US market, thereby depriving American users of the benefits of decentralized financial systems, such as enhanced transparency and lower transaction costs.
The letter concluded with a request for the SEC to re-notice the rule, allowing for meaningful stakeholder input after the agency has gathered and assessed the necessary information.
It further stressed that any regulation in this space must 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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Assad Jafri
AJ, a passionate journalist since Yemen's 2011 Arab Spring, has honed his skills worldwide for over a decade. Specializing in financial journalism, he now focuses on crypto reporting.
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Coinbase
Coinbase is a digital currency exchange and wallet service that allows individuals to buy, sell, and store digital currencies, such as Bitcoin, Ethereum, and Litecoin.
Paul Grewal is the Chief Legal Officer of Coinbase where he is responsible for Coinbase’s legal, compliance, global intelligence, risk management and government relations groups.