The legal chief of Coinbase has characterized the SEC’s DEX rule as irrational, emphasizing the regulatory Exception.
The SEC has received a strongly worded comment letter from Coinbase, which is urging the agency to withdraw its proposal to broaden the definition of “exchange” to encompass decentralized exchanges (DEXs).
The crypto exchange contends that the SEC’s proposal is profoundly defective and does not include a sufficient cost-benefit analysis. Paul Grewal, the Chief Legal Officer of Coinbase, underscored that the rule could stifle innovation and impose untenable compliance burdens on DEXs.
Grewal contended in the letter to SEC Secretary Vanessa A. Countryman that the proposed rule fails to consider the unique operational characteristics of DEXs and the potentially grievous economic impacts on the broader crypto market. The expanded definition’s primary objective is to regulate DEXs, which enable the trading of digital assets without a central intermediary, which is the primary concern of Coinbase.
The rule would impose “anachronistic and impossible-to-satisfy requirements” on DEXs, which could potentially drive them out of the US market entirely, according to the exchange. This could result in a substantial decrease in the competitiveness and innovation of the American financial sector, as developers and businesses may be compelled to relocate operations offshore.
Coinbase emphasized the recent Supreme Court decision in Loper Bright Enterprises v. Raimondo, which invalidated the Chevron deference clause. The exchange contended that this ruling reduces the probability of courts affirming the SEC’s attempt to extend the Exchange Act’s reach to DEXs, particularly when the agency acknowledges that it lacks sufficient information regarding the operation of DEXs.
In the letter, Coinbase criticized the SEC for basing its cost estimates on conventional, centralized entities, which Coinbase argued are essentially different from decentralized platforms. It observed that DEXs, which lack a centralized group of individuals, are unable to adhere to current registration and disclosure requirements. Consequently, the SEC’s assumptions regarding compliance costs are both unrealistic and misleading.
The SEC is unable to conduct a comprehensive cost-benefit analysis due to a lack of essential information, such as a clear definition of “crypto asset security” and the number of exchanges operating in the market, as Grewal noted. He declared:
“It is therefore impossible to comprehend how the Commission could have fulfilled its statutory and procedural obligations to regulate in accordance with the most reliable information available, given that the Commission acknowledges that it has either no or limited information on numerous critical issues.”
The exchange requested that the SEC withdraw the proposed rule and undertake a more comprehensive evaluation of the economic implications before contemplating any additional regulatory action. Coinbase cautioned that the ruling, in its present form, would likely result in the withdrawal of DEXs from the US market, depriving American consumers of benefits such as reduced transaction costs and improved transparency.
Coinbase has submitted its third comment letter regarding the proposed rule change. Since its introduction in 2022, the SEC proposal has been the subject of criticism from a variety of industry actors and legislators. Additionally, the Blockchain Association and Republican members of the House Financial Services Committee have submitted comments that are in opposition to the proposal.
In March, Coinbase contested the applicability of the Howey test to digital assets in response to an SEC lawsuit that claimed the crypto exchange operated without appropriate registration. They sought to discharge the lawsuit.
The SEC’s rejection of Coinbase’s rulemaking petition was the subject of a legal challenge last month, in which the company criticized the agency for its arbitrary and detrimental enforcement practices, which lacked clear guidelines.
Also Read: Canadian Crypto Exchange ezBtc Charged with Gambling $9.5M User Funds
Wallets