Coinbase urges SEC to retract DeFi rule, calls it ‘fundamentally flawed’

Source: Crypto Briefing

Coinbase has submitted a strongly worded comment letter to the SEC, urging the agency to withdraw its proposal to expand the definition of “exchange” to include decentralized exchanges (DEXs).

The crypto exchange argues that the SEC’s proposal is fundamentally flawed and lacks adequate cost-benefit analysis. Coinbase Chief Legal Officer Paul Grewal emphasized that the rule could stifle innovation and impose unworkable compliance burdens on DEXs.

In the letter addressed to SEC Secretary Vanessa A. Countryman, Grewal contended that the proposed rule fails to account for the unique operational characteristics of DEXs and the potentially severe economic impacts on the broader crypto market. Coinbase’s main concern is that the expanded definition aims primarily at regulating DEXs, which facilitate trading in digital assets without a central intermediary.

The exchange warned that the rule would impose “anachronistic and impossible-to-satisfy requirements” on DEXs, potentially driving them out of the US market entirely. 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 operations offshore.

Legal precedent defines ‘operation’

Coinbase highlighted the recent Supreme Court ruling in Loper Bright Enterprises v. Raimondo, which overturned the Chevron deference. The exchange argued this ruling diminishes the likelihood of courts upholding the SEC’s attempt to extend the Exchange Act’s reach to DEXs, especially when the agency admits to lacking sufficient information on how DEXs operate.

The letter criticized the SEC for basing its cost estimates on traditional, centralized entities, which Coinbase argued are fundamentally different from decentralized platforms. It noted that DEXs, operating without a centralized group of persons, cannot comply with existing registration and disclosure requirements, making the SEC’s assumptions about compliance costs unrealistic and misleading.

Grewal pointed out that the SEC lacks necessary information to conduct a proper cost-benefit analysis, including a clear definition of “crypto asset security” and the number of exchanges operating in the market. He stated:

“It is accordingly impossible to see how the Commission could possibly have discharged its statutory and procedural obligations to regulate in light of the best available information when the Commission admits that on many key issues it has little or no information at all.”

SEC rule could lead to exit from US crypto firms

The exchange called for the SEC to withdraw the proposed rule and conduct a more thorough assessment of economic impacts before considering further regulatory action. Coinbase warned that the rule, as currently proposed, would likely lead to the exit of DEXs from the US market, depriving American users of benefits such as enhanced transparency and lower transaction costs.

This comment letter is Coinbase’s third on the proposed rule change. The SEC proposal, initially introduced in 2022, has faced criticism from various industry players and lawmakers. The Blockchain Association and Republican members of the House Financial Services Committee have also filed comments opposing the proposal.

In March, Coinbase sought to dismiss an SEC lawsuit alleging the crypto exchange operated without proper registration, challenging the application of the Howey test to digital assets.

Last month, Coinbase legally contested the SEC’s rejection of its rulemaking petition, criticizing the SEC for arbitrary and harmful enforcement practices without clear guidelines.

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Author: Vince Dioquino