Securities Act

DEXes are not securities exchanges, argues crypto venture firm Paradigm.

Crypto venture capital firm Paradigm has slammed the United States Securities and Exchange Commission’s attempt to redefine the term “exchange” — which if accepted, would bring decentralized exchanges under its purview. 

On June 8, the firm sent a lengthy 14-page letter to the SEC secretary, Vanessa Countryman, regarding the regulator’s proposed redefinition of the term “exchange” in the 1934 Securities Exchange Act.

The SEC plans to revise the 89-year-old legislation to encompass decentralized exchanges (DEXes) and decentralized finance (DeFi) into the definition of "exchange." Because the term DEX contains the word “exchange,” the SEC wants to treat it the same as a securities or stock exchange.

Today, @paradigm commented on the @SECGov's proposed redefinition of “exchange"

Through haphazard rulemaking, the SEC inappropriately attempts to bring crypto trading platforms, including DEXs, under its remit and regulate them as securities exchangeshttps://t.co/ibv2u1n9VU

— Rodrigo (@RSSH273) June 8, 2023

Paradigm, however, argues that fundamental differences between DEXs and exchanges make treating them as “exchanges” under the Act both “invalid and incoherent.”

“It thus appears that after suing Coinbase for failing to do the impossible — registering as a securities exchange when it was incapable of doing so — the Commission now intends to force DEXs into the same Hobson’s choice.”

Paradigm’s legal counsel, Rodrigo Seira, commented that through this “haphazard rulemaking, the SEC inappropriately attempts to bring crypto trading platforms, including DEXs, under its remit and regulate them as securities exchanges.”

In March 2022, the SEC proposed changes to the Act to include systems that “offer the use of non-firm trading interest and communication protocols to bring together buyers and sellers of securities.” In other words, any platforms that facilitate digital asset exchange or swaps.

Paradigm argues that DEXs neither serve as intermediaries nor have an “organization, association, or group of persons” that maintains the exchange.

Instead, they used market-making algorithms to balance pools of crypto assets that potential buyers or sellers can freely access. Additionally, DEXs run on self-executing code and smart contracts, not associations or groups of people, it argued.

Related: SEC crackdown on Binance and Coinbase surge DeFi trading volumes 444%

The SEC has pulled no punches this week with twin lawsuits against two of the world’s largest crypto exchanges, Binance and Coinbase.

Furthermore, years of SEC action against crypto have seen the agency deem at least 67 digital assets as securities. However, Congress has yet to pass any official legislation for crypto markets classifying them as such.

Meanwhile, Cointelegraph revealed that enforcement action by the federal regulator targeting crypto companies surged 183% in 6 months after the FTX collapse.

Magazine: Crypto regulation: Does SEC Chair Gary Gensler have the final say?