Coinbase Calls on SEC to Roll Back DeFi Rule, Calling It 'Fundamentally Flawed'

Coinbase files strongly worded statement comment letter to the Securities and Exchange Commission (SEC), calling on 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 an adequate cost-benefit analysis. Coinbase Chief Legal Officer Paul Grewal stressed that the rule could stifle innovation and impose an impossible compliance burden on DEXs.

In a letter addressed to SEC Secretary Vanessa A. Countryman, Grewal argued that the proposed rule fails to take into account the unique operating characteristics of DEXs and the potentially serious economic impact on the broader cryptocurrency market. Coinbase’s main concern is that the expanded definition is primarily aimed at regulating 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 forcing them out of the U.S. market entirely. This could lead to a significant reduction in innovation and competitiveness in the U.S. financial sector, as developers and companies could be forced to move operations overseas.

Legal precedent defines “operation”

Coinbase noted the recent Supreme Court decision in Loper Bright Enterprises v. Raimondo, which reversed Chevron's decision. The exchange argued that the decision made it less likely that courts would uphold the SEC's attempt to extend the Exchange Act to DEXs, especially when the agency acknowledged that it had insufficient information about how DEXs operate.

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

Grewal said the SEC lacks the information it needs 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 said:

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

SEC Rule Could Lead to Exit for US Crypto Companies

The exchange called on the SEC to withdraw the proposed rule and conduct a more thorough economic impact assessment before considering further regulatory action. Coinbase warned that the rule in its current form would likely drive DEXs out of the U.S. market, depriving American users of benefits such as increased transparency and lower transaction costs.

This is Coinbase’s third comment letter on the proposed rule change. The SEC’s proposal, originally submitted in 2022, has been criticized by various industry players and lawmakers. The Blockchain Association and Republican members of the House Financial Services Committee have also filed comments against the proposal.

In March, Coinbase tried to dismiss the SEC's lawsuit arguing that the crypto exchange was operating without proper registration, challenging the application of the Howey Test to digital assets.

Last month, Coinbase went legal challenged the SEC's denial its petition for rulemaking, criticizing the SEC for arbitrary and pernicious enforcement practices without clear guidance.

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