Requiring DEXes to register with SEC like other exchanges is 'impossible', says Coinbase CLO

Paul Grewal, chief legal officer of United States-based cryptocurrency firm Coinbase, has pushed back against a proposed rule change from the Securities and Exchange Commission (SEC) which could change the definition of an exchange and how digital assets are regulated.

In a June 14 Twitter thread, Grewal said the SEC proposal “tries to fit a square peg in a round hole” and was “too flawed on process and substance to move forward”. He was referring to the SEC extending the comment period for a proposed rule change in the Securities Exchange Act of 1934 which could have securities laws apply to decentralized exchanges in the same way they currently apply to securities exchanges.

“Requiring a DEX to register in the same way as a national securities exchange is impossible,” said Grewal. “Requiring the impossible violates the [Administrative Procedure Act]. And simply saying there is no economic data doesn’t absolve the SEC from conducting economic analysis, especially when that data exists.”

He added:

“The SEC is attempting to front run Congressional action by baking unsupported assumptions about its crypto jurisdiction into the proposed rules.”

Some U.S. lawmakers and crypto advocacy groups including the Blockchain Association have also criticized the SEC proposal, claiming the rule change would allow the commission to exceed its authority and expand its purview to a range of financial products not equipped to handle such regulatory requirements. According to the Coinbase CLO, there was a path forward with the proposed rule change, requiring “robust consideration of the profound differences between a DEX and a traditional exchange”.

Yesterday we filed a comment letter on the @SECGov proposed rule that seeks to expand the definition of exchange to include DEXs. Tl; dr: this proposal should NOT be adopted, and certainly not before completing the threshold steps for any rulemaking. 1/11 https://t.co/fBXAYiWb4W

— paulgrewal.eth (@iampaulgrewal) June 14, 2023

Coinbase’s comments came amid the SEC being at the forefront of attention in the U.S. concerning the regulation of cryptocurrency. The commission has filed separate lawsuits against Binance and Coinbase for alleged violations of securities laws, prompting backlash from lawmakers calling for SEC chair Gary Gensler’s removal.

Prior to the SEC lawsuit — but following a Wells notice suggesting a potential enforcement action — Coinbase filed a reply in support of its July 2022 petition for a writ of mandamus in an attempt to force the commission to provide regulatory clarity for firms seeking to register. As of June 13, the SEC was awaiting the results of an appeal filed in federal court requesting 120 days to respond to Coinbase’s request.

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