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

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

In the letter 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 dire economic impact on the broader crypto 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 impossible requirements” on DEXs, potentially driving them out of the U.S. market altogether. This could lead to a significant reduction in innovation and competitiveness within the U.S. financial sector, as developers and companies are forced to move their operations overseas.

Case law defines ‘operation’

Coinbase highlighted the Supreme Court’s recent ruling in Loper Bright Enterprises v. Raimondo, which overturned the Chevron stay. The exchange argued that this ruling reduces the likelihood that courts will uphold the SEC’s attempt to expand the Exchange Act’s reach to DEXs, especially when the agency admits it doesn’t have enough information about how DEXs work.

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, which operate without a centralized group of individuals, cannot meet existing registration and disclosure requirements, making the SEC’s assumptions about compliance costs unrealistic and misleading.

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

“It is therefore impossible to see how the Commission could fulfil its legal and procedural obligations to regulate in the light of the best available information when the Commission admits that it has little or no information on many important issues.”

SEC rule could lead to exit of US crypto companies

The exchange called on the SEC to withdraw the proposed rule and conduct a more thorough assessment of its economic impact before considering further regulatory action. Coinbase warned that the rule, as currently proposed, would likely result in the exit of DEXs from the U.S. market, depriving American users of benefits such as improved transparency and lower transaction fees.

The comment letter is Coinbase’s third on the proposed rule change. The SEC proposal, originally filed in 2022, has been criticized by several 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 attempted to dismiss an SEC lawsuit alleging that the cryptocurrency exchange operated without proper registration and challenging the application of the Howey test to digital assets.

Last month, Coinbase filed a legal challenge to the SEC’s denial of its regulatory request. The SEC was criticized for arbitrary and harmful enforcement practices without clear guidelines.

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