Coinbase has submitted a strongly worded comment letter to the US Securities and Exchange Commission (SEC) opposing the agency’s proposal to expand the definition of “exchange” to include decentralized exchanges (DEXs).

The SEC’s proposal, which has reopened for public comment, has faced significant backlash from Coinbase and other industry players. The exchange’s letter highlighted concerns that the rule could hinder innovation and impose unrealistic compliance burdens on DEXs.

Fundamentally flawed

In the letter addressed to SEC Secretary Vanessa A. Countryman, Coinbase Chief Legal Officer Paul Grewal argued that the proposed rule is fundamentally flawed in both its design and execution.

The letter emphasized that the SEC’s cost-benefit analysis is insufficient, as it fails to consider the unique operating characteristics of DEXs and the potentially severe economic repercussions of the proposed regulations on the broader crypto market.

Coinbase’s main argument is that the SEC’s proposed expansion of the exchange definition is primarily aimed at regulating DEXs, which facilitate trading in digital assets without a central intermediary. The company asserts that the rule would impose “anachronistic and impossible-to-meet requirements” on DEXs, potentially forcing them out of the US market entirely.

The exchange further warned that this could lead to a substantial decline in innovation and competitiveness within the American financial sector, as developers and businesses may be forced to relocate their operations overseas.

The letter also highlighted the recent Supreme Court decision in Loper Bright Enterprises v. Raimondo, which overturned the Chevron deference and further cast doubt on the legality of the SEC’s proposed rule.

Coinbase argued that the court's decision reduces the chances of courts supporting the SEC's attempt to apply the Exchange Act to Decentralized Exchanges (DEXs), particularly considering the agency's own admission of lacking sufficient knowledge about how DEXs function.

Furthermore, the exchange criticized the SEC for basing its cost calculations on conventional, centralized entities, which the company claimed are inherently different from decentralized platforms.

It asserted that DEXs, operating without a centralized group of individuals, cannot fulfill existing registration and disclosure requirements, rendering the SEC's assumptions about compliance costs both unrealistic and deceptive.

Call to withdraw

Coinbase is urging the SEC to withdraw the proposed rule and conduct a more comprehensive and logical assessment of the economic impacts before taking any further regulatory actions.

The exchange cautioned that the rule, in its current form, would likely force DEXs to leave the US market, thereby denying American users the advantages of decentralized financial systems, such as increased transparency and lower transaction costs.

The letter concluded by requesting the SEC to re-publish the rule, enabling meaningful input from stakeholders after the agency has gathered and evaluated the necessary information.

The document further emphasized that any regulations in this sector must be founded upon a clear and consistent definition of what constitutes a security within the digital asset market. Notably, the SEC has yet to provide such a definition .