Coinbase exploits SEC’s arbitrary approach to DEX compliance

Coinbase sent its third comment letter highlighting significant flaws in the cost-benefit analysis of the US Securities and Exchange Commission’s (SEC) proposed rule. The letter argued that the agency has failed to assess the rule’s economic impact on efficiency, competition and capital formation.

While acknowledging the lack of critical information about decentralized exchange (DEX) operations and compliance costs, Coinbase said the SEC has proposed vague benefits that may not materialize, especially if DEXs are pushed out of the northern market – American

SEC regulations under fire

The letter’s author and Coinbase’s chief legal officer, Paul Grewal, stated that the SEC should withdraw the proposal and re-do it after conducting a thorough investigation.

The crypto exchange’s letter also stated that the SEC has breached its statutory obligations by failing to gather essential information about DEXs, admitting gaps in understanding of key aspects of their operation, and making unwarranted assumptions based on entities that do not they are DEX.

The Coinbase executive argued that the regulator’s approach is arbitrary and irrational, as DEXs operate fundamentally differently and would face prohibitive compliance costs.

He further stated that the SEC cannot accurately assess the costs and benefits of the proposed changes without clarifying when digital assets are classified as securities. The agency’s inconsistent approach, which relies on case-by-case litigation rather than clear rules, has created uncertainty for industry participants and the courts.

Meanwhile, the proposed changes have exacerbated this uncertainty, ambiguously stating that digital assets may or may not be securities. This vagueness undermines the reliability of the cost-benefit analysis according to Coinbase.

Small DEXs at risk

Coinbase also considered the rule’s negative impact on its services, such as the Base network and its wallet offerings, potentially driving DEXs out of the market. Smaller DEXs would be disproportionately affected due to high compliance costs, creating an unfair advantage for larger operators. The proposal’s vague language increases the compliance burden.

The SEC has previously recognized these evaluation costs, but ignores them here, further calling into question the validity of the rule’s cost analysis.

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