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

Share this article

Coinbase sent 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 (DEX).

The crypto exchange claims the SEC proposal is fundamentally flawed and lacks a proper cost-benefit analysis. Coinbase Chief Legal Officer Paul Grewal pointed out that the rule could stifle innovation and impose impossible compliance burdens on DEXs.

In the letter to SEC Secretary Vanessa A. Countryman, Grewal argued that the proposed rule ignores 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 primarily targets the regulation of DEXs, which facilitate the trading of digital assets without a central intermediary.

The exchange warned that the rule would impose “anachronistic and unenforceable requirements” on DEXs, potentially driving them off the US market entirely. This could lead to a significant reduction in innovation and competitiveness in the US 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 Chevron compliance. The exchange argued that this ruling makes it less likely that the courts will uphold the SEC’s attempt to extend the scope of the Exchange Act to DEXs, especially when the agency admits that it does not have enough information about 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 individuals, 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 the 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:

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

SEC rule could lead to exit from US crypto companies

The Exchange asked the SEC to withdraw the proposed rule and conduct a more thorough economic impact assessment before considering further regulatory action. Coinbase has warned that the rule, as currently proposed, will likely drive DEXs out of the US market, depriving US users of benefits such as increased transparency and lower transaction costs.

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

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

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

Share this article