Coinbase Spars With SEC Over “Irrational” DEX Regulation

Coinbase continues its dispute with the U.S. Securities and Exchange Commission (SEC), recently urging the regulator to withdraw its rule on decentralized exchanges (DEX).

This ongoing dispute could further define the legal boundaries of decentralized finance (DeFi) operations in the United States.

Coinbase Calls SEC DEX Rule “Irrational”

In a letter to the U.S. SEC on Monday, Coinbase Chief Legal Officer Paul Grewal urged the regulator to withdraw its proposed rule requiring decentralized exchanges to fall under the agency’s jurisdiction. If adopted, the rule, which dates back to January 2022, would require DeFi projects to register as alternative trading systems.

“Coinbase remains concerned about the Commission’s proposed expansion of the term ‘exchange’ – which the SEC’s reopening has confirmed was designed in part to target decentralized exchanges (DEXs) that facilitate the trading of digital assets,” the letter opens.

Key highlights of Coinbase’s letter to the SEC include:

• The APA and the Exchange Act require rigorous scrutiny of the economic impacts of the rule.
• The Commission’s cost-benefit analysis lacks essential information and relies on irrational assumptions.
• The Commission ignores critical costs and underestimates the magnitude of the costs it claims to take into account.
• The commission fails to demonstrate that any problem requires regulation and overstates the rule’s purported benefits.

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The point of contention between Grewal and Coinbase is that the proposal would kill innovation in cryptocurrency markets in a number of ways. One of them is imposing impossible-to-measure requirements on DEXs. Coinbase’s CLO refers to the disappearance of Chevron’s deference, obtained by Paul Clement, one of Coinbase’s board members.

Grewal said Clement’s success reflects the unlikelihood that reviewing courts will accept the regulator’s sweeping attempt to stretch key Exchange Act terms far beyond their original meaning. Coinbase therefore urges the commission to withdraw and reconsider the rule and allow meaningful stakeholder input.

Coinbase plunged into legal troubles

Coinbase continues to advocate for regulatory clarity, but it is mired in legal issues. These developments suggest that the case, which began in June 2023 and has already lasted for more than a year, is far from over. This is in line with Gary Gensler’s position that crypto platforms must register with the US SEC. According to him, they are considered exchanges, whether they are centralized or decentralized.

In this vein, the regulator accused Coinbase, along with other platforms like Uniswap Labs, of operating as unregistered exchanges. This case set a precedent for imposing significant restrictions under the guise of consumer protection and market integrity.

Coinbase believes the regulator is overstepping its regulatory authority without providing clear guidance on what constitutes a security in the first place. The exchange attempted to use SEC filings to demonstrate this lack of clarity, but its request hit a wall.

Coinbase’s legal challenges extend beyond the SEC. The exchange is also in conflict with the Federal Election Commission (FEC) after digital asset critic Molly White and Public Citizen accused Coinbase of violating FEC laws with its $25 million donation to the Fairshake Super PAC.

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Coinbase also opposes the Commodities Futures Trading Commission’s proposal to implement a rule on prediction markets. Coinbase argues that the rule misinterprets the Commodities Futures Trading Act.