Coinbase Challenges SEC's Proposal to Regulate Decentralized Exchanges

Coinbase has issued a strongly worded letter to the U.S. Securities and Exchange Commission (SEC), urging the agency to withdraw its proposal to redefine “exchange” to include decentralized exchanges (DEXs).

Fundamental Flaws Cited

Coinbase argues that the SEC’s proposal is deeply flawed, lacking a proper cost-benefit analysis and potentially stifling innovation. Paul Grewal, Coinbase's Chief Legal Officer, highlighted concerns that the rule would impose unworkable compliance burdens on DEXs, which operate without central intermediaries.

Economic Impact Concerns

In the letter addressed to SEC Secretary Vanessa A. Countryman, Grewal pointed out that the proposed rule does not adequately consider the unique operational characteristics of DEXs. He warned that the regulation could severely impact the broader crypto market by driving DEXs out of the U.S., leading to a decline in innovation and competitiveness within the American financial sector.

Legal Precedent and Criticism

Coinbase also referenced the Supreme Court's recent ruling in Loper Bright Enterprises v. Raimondo, arguing that this precedent weakens the SEC’s position. The letter criticized the SEC for basing its cost estimates on traditional, centralized entities, which differ significantly from decentralized platforms. Grewal emphasized that the SEC lacks sufficient information on DEX operations, making its assumptions about compliance costs unrealistic.

Call for Withdrawal and Reassessment

Coinbase has called for the SEC to withdraw the proposed rule and conduct a more thorough assessment of its economic impacts before taking further action. The exchange warned that if the rule is implemented as proposed, it could force DEXs to exit the U.S. market, depriving American users of the benefits of these platforms.

Ongoing Legal and Regulatory Challenges

This letter marks Coinbase’s third response to the SEC's proposed rule change, which has faced significant criticism from various industry stakeholders and lawmakers. In addition to this challenge, Coinbase is currently engaged in legal disputes with the SEC, including a lawsuit concerning the application of the Howey test to digital assets and the SEC's rejection of Coinbase's rulemaking petition.