According to reports, Coinbase has submitted a strongly worded opinion letter to the US Securities and Exchange Commission (SEC), urging the agency to withdraw its proposal to expand the definition of "exchange" to include decentralized exchanges (DEXs).

Coinbase believes that the SEC's proposal has fundamental flaws and lacks sufficient cost-benefit analysis. Coinbase's Chief Legal Officer Paul Grewal emphasized that this regulation may suppress innovation and impose difficult compliance burdens on DEXs.

In a letter to SEC Secretary Vanessa A. Countryman, Paul Grewal pointed out that the proposal did not take into account the unique operational characteristics of DEXs and the potential serious economic impact on the broader cryptocurrency market. Coinbase warns that the rule will impose "outdated and difficult to meet requirements" on DEXs and force them to completely exit the US market. This could lead to a significant decline in innovation and competitiveness in the US financial industry, as developers and businesses may be forced to shift their business overseas.

SEC lacks sufficient information on DEXs

Coinbase emphasized the latest ruling of the Supreme Court in Loper Bright Enterprises v. Raimondo, which overturned Chevron's principle of judicial respect. Coinbase believes that this ruling reduces the likelihood of the court supporting the SEC's application of the Exchange Act to DEXs, especially given the SEC's own admission of a lack of sufficient information to understand how DEXs operate.

The letter criticized the SEC for estimating costs based on traditional centralized entities, while Coinbase believes that these entities are fundamentally different from decentralized platforms. The letter points out that DEXs operate without a centralized operating entity and cannot comply with existing registration and disclosure requirements, therefore the SEC's assumption of compliance costs is unrealistic and misleading.

Grewal pointed out that the SEC lacks key information necessary for conducting appropriate cost-benefit analysis, including a clear definition of "crypto asset securities" and the number of exchanges operating in the market. He said:

It is difficult to understand how the committee can fulfill its legal and procedural obligations to regulate based on the best available information, given that the committee acknowledges that there is little or no information on many key issues

SEC rules may lead to cryptocurrency companies exiting the United States

Coinbase calls on the SEC to withdraw this proposal and conduct a more in-depth economic impact asses**ent before considering further regulatory action. Coinbase warns that according to the current proposal, this rule may lead to DEXs exiting the US market, thereby depriving US users of the advantages of higher transparency and lower transaction costs.

This is the third time Coinbase has provided feedback on this rule change. The proposal initially proposed by the SEC in 2022 has been criticized by multiple industry participants and legislators. The Blockchain Association and Republican members of the House Financial Services Committee have also submitted objections to the proposal.

In fact, the SEC's enforcement actions against DEXs seem to have quietly begun. According to previous reports by Zombiet, several venture capital funds, including Andreessen Horowitz (a16z) and Union Square Ventures, have received letters from the US Securities and Exchange Commission (SEC) regarding their relationship with decentralized cryptocurrency exchange operator Uniswap Labs.