Coinbase has filed a strongly worded comment letter with the U.S. 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 been 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 conception and execution.
The letter emphasized that the SEC’s cost-benefit analysis is inadequate because it does not take into account the unique operational characteristics of DEXs and the potentially serious economic impact of the proposed regulations on the broader crypto market.
Coinbase’s main claim is that the SEC’s proposed expansion of the exchange definition is primarily aimed at regulating DEXs, which facilitate trading of digital assets without a central intermediary. The company claims the rule would impose “anachronistic and impossible-to-fulfill requirements” on DEXs, potentially driving them out of the U.S. market entirely.
The exchange further warned that this could lead to a significant reduction in innovation and competitiveness within the US financial sector, as developers and companies could be forced to move their operations abroad.
The letter also highlighted the Supreme Court’s recent ruling in Loper Bright Enterprises v. Raimondo, which overturned Chevron’s deference and further called into question the legality of the SEC’s proposed rule.
Coinbase pointed out that the ruling reduces the likelihood that courts will uphold the SEC’s attempt to expand the Exchange Act’s reach to DEXs, especially when the agency itself admits it has insufficient information about how DEXs work.
Additionally, the exchange criticized the SEC for basing its cost estimates on traditional, centralized entities, which it said are fundamentally different from decentralized platforms.
It added that DEXs, which operate without a centralized group of individuals, cannot comply with existing registration and disclosure requirements, making the SEC’s assumptions about compliance costs both unrealistic and misleading.
Call to withdraw
Coinbase calls on the SEC to withdraw the proposed rule and conduct a more thorough and rational economic impact assessment before considering further regulatory action.
The exchange warned that the rule, as currently proposed, would likely lead to the departure of DEXs from the US market, depriving US users of the benefits of decentralized financial systems, such as improved transparency and lower transaction costs.
The letter concluded with a request for the SEC to reinstate the rule, allowing for meaningful stakeholder input after the agency has collected and reviewed the necessary information.
It further emphasized that any regulation in this area must be based on a clear and consistent definition of what constitutes an impact on the digital asset market, a decision that the SEC has yet to make.
