Coinbase Clashes with SEC Over “Irrational” DEX Regulation

Coinbase continues its clash with the US Securities and Exchange Commission (SEC), recently urging the regulator to withdraw its rule on decentralized exchanges (DEXs).

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

Coinbase Terms SEC’s DEX Rule “Irrational”

In a letter to the US SEC on Monday, Coinbase Chief Legal Officer Paul Grewal urged the regulator to withdraw its rule proposal requiring decentralized exchanges to fall under the agency’s remit. If passed, this rule, which dates back to January 2022, would compel 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 trading in digital assets,” the letter opened.

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

• The APA and the Exchange Act mandate rigorous consideration of the rule’s economic impacts.
• The commission’s cost-benefit analysis lacks critical information and rests on irrational assumptions.
• The commission fails to consider critical costs and understates the magnitude of costs that it does purport to consider.
• The commission fails to show that any problem requires regulation and overstates the rule’s purported benefits.

Read more: Coinbase Review 2024: The Best Crypto Exchange for Beginners?

Grewal and, therefore, Coinbase’s bone of contention is that the proposal would terminate innovation in crypto markets in various ways. Among them is to saddle DEXs with impossible-to-satisfy requirements. The Coinbase CLO referred to the demise of the Chevron deference, achieved by Paul Clement, one member of the Coinbase board of directors.

According to Grewal, Clement’s success mirrors the unlikelihood that reviewing courts will agree with the regulator’s sweeping attempt to stretch the Exchange Act’s key terms far beyond their original meaning. Coinbase, therefore, urges the commission to withdraw and re-notice the rule and allow meaningful stakeholder input.

Coinbase Neck-Deep in Legal Woes

As Coinbase continues to champion regulatory clarity, it is neck-deep in legal issues. These developments suggest that the case, which began in June 2023 and is already over a year old, is far from over. It tethers to Gary Gensler’s stance that crypto platforms must register with the US SEC. He says they qualify as exchanges, whether centralized or decentralized.

On this stance, the regulator charged Coinbase, among other platforms like Uniswap Labs, for operating as unregistered exchanges. The case set a precedent imposing significant restrictions under the pretext of consumer protection and market integrity.

Coinbase’s stand is that the regulator is overstepping its regulatory authority without clear guidelines on what constitutes security in the first place. The exchange aimed to use the SEC’s documents to demonstrate this lack of clarity but hit a brick wall in its request.

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 Fairshake Super PAC.

Read more: Crypto Regulation: What Are the Benefits and Drawbacks?

It also opposes the Commodities Futures Trading Commission’s proposed prediction market rule. Coinbase argues this rule misinterprets the Commodity Exchange Act.