Coinbase has voiced its opposition to a proposed rule by the US Securities and Exchange Commission (SEC) aiming to subject decentralized exchanges (DEX) to the same regulatory obligations as traditional exchanges.
The rule, which would broaden the definition of an ‘exchange’ to include DEX, could impose high compliance costs along with uncertainty regarding the definition of securities, complicating DEX operations.
Coinbase’s chief legal officer, Paul Grewal, has called on the SEC to review its proposal, citing a recent Supreme Court decision overturning the Chevron doctrine, which weakens the SEC’s ability to overly interpret existing laws.
The SEC’s proposed rule, first introduced in January 2022, was reopened for comments last April, eliciting numerous reactions within the crypto industry.
Criticism of the SEC’s Proposed Rule
The SEC’s proposed rule expands the definition of an ‘exchange’ to include DEX, which could require them to register with the agency as alternative trading systems (ATS). According to Grewal, the SEC’s proposal is based on an ‘irrational’ assumption that decentralized exchanges can comply with the same requirements as centralized platforms.
In his letter, Grewal highlights that DEX cannot meet the disclosure and registration requirements designed for traditional exchanges run by centralized companies. Additionally, he questions the SEC’s ability to explain how registered DEX could facilitate the trading of digital assets.
Regulatory and Legal Context
The SEC’s position, advocated by its chairman Gary Gensler, states that most crypto trading platforms must register with the agency as the majority of cryptocurrencies are considered securities.
Gensler has also stated that ‘an exchange is still an exchange, centralized or decentralized.’ In this regard, the SEC has already taken actions against certain companies, including Coinbase, for operating as unregistered exchanges and has issued a Wells Notice against Uniswap Labs, the developer of decentralized exchange platform Uniswap.
Implications for Decentralized Exchanges
One of the main concerns raised by Grewal is the substantial compliance costs that DEX will have to bear to determine which digital assets are considered securities. He also warns of the ongoing uncertainty regarding the SEC’s final definition of securities, which could further complicate the situation for DEX.
Reference to Jurisprudence and the Chevron Doctrine
In his letter, Grewal references a recent decision by the US Supreme Court that overturned the Chevron doctrine, a legal rule that allowed courts to defer to a federal agency’s interpretation when the law was ambiguous. This decision weakens, according to him, the SEC’s ability to overly extend key terms of the Exchange Act beyond their original meaning.
In the face of these points of disagreement, Coinbase urges the SEC to review its proposal and start from scratch to develop rules that are more tailored to the specificities of decentralized exchanges. The company continues to advocate for regulation that recognizes the fundamental differences between DEX and traditional financial exchanges while allowing for innovation and growth in the crypto ecosystem.
