Coinbase criticizes SEC’s new definition of “exchange”
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Coinbase has taken a swipe at the US Securities and Exchange Commission (SEC) for including decentralized exchanges (DEXs) in its new definition of exchanges.
After all, Coinbase has officially opposed the SEC’s proposal to expand the definition of exchanges. In a statement on the X platform (formerly Twitter), Paul Grewal, Coinbase’s chief legal officer, criticized the SEC for including DEXs in the new definition “without adequate analysis.”
Today coinbase submitted another set of concerns with SECgov over the agency’s proposal to expand the definition of “exchange.” In short, the SEC’s proposal lacks critical analysis, rests on irrational assumptions, fails to show that there is any problem in need of regulation,…
The company emphasized the need for careful consideration of their comments and expressed willingness to continue discussions on this issue.
As per Coinbase’s statement:
“At the very least, the proposal should be withdrawn and corrected.”
Coinbase’s argument against the new exchange definition
Coinbase Exchange has once again taken a stand against a recent move by the SEC that included several trading platforms, including DEXs, under the same label.
According to Paul, Coinbase has filed a new set of concerns with the SEC about the agency’s proposal to expand the definition of “exchange.” Coinbase argues that the proposal is flawed and lacks essential analysis. Furthermore, the company claims that the assessment is based on unreasonable assumptions.
Therefore, according to Coinbase’s chief legal officer, the SEC would need to demonstrate a genuine need for the proposed regulation. After all, the benefits assumed in the decision were exaggerated.
Coinbase claims that the SEC failed to gather background information or conduct an economic analysis on how the proposal would impact DEXs. Yet, the agency has moved forward with a proposal that is based on unproven assumptions.
The firm also warns that extending the exchange rule to DEXs could have serious consequences for millions of Americans who trade digital assets. It would also risk stifling innovation in the growing DEX market.
One criticism of the SEC’s approach is its assumption that a problem needs to be fixed without providing evidence that the problem exists. Coinbase says that view is inconsistent with sound regulatory practices, and is asking that the proposal be revised — and that it cease to have effect in the meantime.
The SEC recently asked a New York court to deny a subpoena from Coinbase demanding extensive documents related to crypto assets.
After all, the agency argues that the company’s request is too broad and that it would be demanding irrelevant documents. For example, it would include internal communications and files from investigations unrelated to Coinbase.
Rules have been criticized by the crypto industry
The SEC has a history of proposing regulations that have sparked controversy in the crypto industry, and is often accused of stifling innovation and growth.
The most recent example occurred in February 2024, when the agency expanded its definition of “dealer” to encompass a wider range of financial transactions. For example, it now includes those involving crypto assets.
The SEC’s expanded definition of a dealer applies to all types of securities, including crypto assets. It is based on the nature of the trading activities, not the type of security itself.
According to the SEC, this change is part of a broader regulatory effort to exercise stricter oversight over the growing crypto market.
The new rule has sparked a strong backlash from the crypto industry, with many arguing that it could impose undue burdens on innovation.
In fact, the Blockchain Association and the Crypto Freedom Alliance of Texas (CFAT) have filed a lawsuit against the SEC in the Northern District of Texas.
These entities argue that the SEC’s expansion of the Dealer Rule stifles innovation in the U.S. digital asset market. After all, it imposes traditional financial regulations on an industry based on very different foundations.
Furthermore, critics of the SEC’s approach argue that the new rule could push some companies into more crypto-friendly jurisdictions. In other words, it would further weaken the U.S. position in the global digital asset market.
The response from the Blockchain Association and CFAT reinforces ongoing tension between the SEC and the crypto industry as both sides seek to shape the future of digital finance in the U.S. The outcome of the lawsuit could have important implications for how companies in the sector are regulated in the future.
SEC recently relaxed rules
Despite the tension between the SEC and cryptocurrency companies in the US, the sector also manages to reap positives from time to time.
For example, last July, the agency announced new exemptions that exempt banks and brokerages from including clients’ crypto assets in their financial statements.
This decision by the SEC to ease rules on crypto reporting comes two years after the introduction of its controversial SAB 121 guidance.
The directive aimed to increase transparency and risk management in the cryptocurrency space. Custody obligations needed to be recognized as liabilities on balance sheets, along with detailed disclosures about the risks associated with them.
However, the implementation of SAB 121 was not without controversy. Many industry leaders viewed the regulation as an overreach of the SEC’s authority, imposing undue and excessive burdens on businesses.
Furthermore, the regulation did not clearly distinguish between cryptocurrencies on public blockchains and traditional assets on permissioned blockchains, critics said, complicating companies’ compliance efforts.
Finally, on July 11th of this year, the SEC announced new exemptions for cryptocurrency reporting by banks and exchanges. The backtracking was largely due to pressure from the industry, including on the US Congress.
SEC has ongoing action against Coinbase
Coinbase’s criticism of the SEC’s new definition of an exchange is not the only point of friction between the company and the US regulator.
After all, the SEC has an open case against the cryptocurrency giant in the US. The claim is that several cryptocurrencies listed on Coinbase qualify as securities. Therefore, according to the agency, they should be registered in accordance with the country’s securities laws.
This case has been seen as paradigmatic for the future of the cryptocurrency industry in the US. This is because the effects of a possible decision could influence the entire regulatory structure that governs the local crypto market.
Former Justice Department attorney Seth Goertz stressed that the case could impact not only Coinbase, but also other exchanges and the market in general. According to him:
“If the courts say Bitcoin is a security, then anyone who holds Bitcoin or anyone who is trading Bitcoin that way on an exchange will be subject to the SEC.
