Coinbase has reportedly submitted a strongly worded letter to the U.S. Securities and Exchange Commission (SEC) urging the agency to withdraw its proposal to expand the definition of “exchange” to include decentralized exchanges (DEXs).
Coinbase believes the SEC’s proposal is fundamentally flawed and lacks an adequate cost-benefit analysis. Coinbase General Counsel Paul Grewal stressed that the regulation could stifle innovation and impose an unattainable compliance burden on DEXs.
In a letter to SEC Secretary Vanessa A. Countryman, Paul Grewal noted that the proposal does not take into account the unique operating characteristics of DEXs and the potentially severe economic impact on the broader crypto market. Coinbase warned that the rule would impose "outdated and difficult to meet requirements" on DEXs and force them to exit the U.S. market entirely. This could lead to a significant decrease in innovation and competitiveness in the U.S. financial industry, as developers and companies may be forced to move operations overseas.
SEC lacks sufficient information on DEXs
Coinbase highlighted the Supreme Court’s latest ruling in Loper Bright Enterprises v. Raimondo, which overturned Chevron’s judicial deference doctrine. Coinbase believes that this ruling reduces the likelihood that a court will support the SEC’s application of the Exchange Act to DEXs, especially since the SEC itself admitted that it lacks sufficient information to understand how DEXs operate.
The letter criticizes the SEC for basing its cost estimates on traditional centralized entities, which Coinbase believes are fundamentally different from decentralized platforms. The letter states that DEXs operate without a centralized operating entity and cannot comply with existing registration and disclosure requirements, so the SEC’s assumptions about compliance costs are unrealistic and misleading.
Grewal noted that the SEC lacked key information needed to conduct a proper cost-benefit analysis, including a clear definition of “crypto-asset securities” and the number of exchanges operating in the market. He said:
"It is not clear how the Commission can discharge its statutory and procedural obligations to regulate on the basis of the best available information when it admits that it has little or no information on many key issues."
SEC rules could lead to crypto companies exiting the U.S.
Coinbase called on the SEC to withdraw the proposal and conduct a more in-depth economic impact assessment before considering further regulatory action. Coinbase warned that as currently proposed, the rule could cause DEXs to exit the U.S. market, depriving U.S. users of the advantages of greater transparency and lower transaction costs.
This is the third time Coinbase has submitted comments on this rule change. The proposal, originally proposed by the SEC in 2022, has already been criticized by multiple industry players and lawmakers. The Blockchain Association and Republican members of the House Financial Services Committee also submitted comments opposing the proposal.
In fact, SEC enforcement actions against DEXs appear to have quietly begun. According to previous reports by Zombit, several venture capital funds, including Andreessen Horowitz (a16z) and Union Square Ventures, have received letters from the U.S. Securities and Exchange Commission (SEC) involving the decentralized encryption exchange operator Uniswap Labs. relation.
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