The U.S. Securities and Exchange Commission should withdraw its rule proposal that would require decentralized exchanges to fall under the agency’s remit and start over, Coinbase Chief Legal Officer Paul Grewal said in a letter on Monday.
The rule, which was first proposed in January 2022 and was reopened for comments in April, broadens the definition of an exchange to capture decentralized exchanges. The rule could ultimately require decentralized projects to register with the agency as alternative trading systems. Hundreds of comment letters have been filed over the years, including from lawmakers, the crypto industry and traditional exchanges such as Nasdaq.
The SEC “irrationally assumes” that decentralized exchanges can comply in the same way as more traditional exchanges, Grewal said his letter to the SEC on Monday.
“Among other issues, DEXs cannot comply with registration and disclosure requirements designed for legacy financial exchanges managed by centralized companies,” Grewal said. “And even if DEXs could somehow comply with existing registration and disclosure rules, the Commission does not explain how SEC-registered DEXs could facilitate the trading of digital assets.”
SEC Chair Gary Gensler has repeatedly said that crypto platforms need to register with the agency and that most cryptocurrencies are securities. In a statement in April 2023, Gensler said most trading platforms meet the definition of an exchange “whether they call themselves centralized or decentralized.” The agency has charged firms, including Coinbase, for operating as an unregistered exchange and brought a Wells notice against Uniswap Labs, the developer of the decentralized exchange Uniswap, this past year.
Decentralized exchanges will also sustain weighty compliance costs to determine which digital assets are securities.
“Even if and when Commission eventually settles on a definition, there is no guarantee that its definition will be the same as whatever (unstated) definition the Commission was contemplating in the Proposed Rule when attempting to conduct its cost-benefit analysis,” Grewal said.
Grewal cited the U.S. Supreme Court’s June ruling that overturned the Chevron doctrine in the letter. The doctrine, also called the Chevron deference, comes from a Supreme Court case in 1984 called Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. In that case, the Supreme Court put forward a legal test that said courts should defer to a federal agency’s interpretation when the law is ambiguous.
“The recent demise of Chevron deference only underscores how unlikely it is that reviewing courts will agree with the Commission’s sweeping attempt to stretch the Exchange Act’s key terms far beyond their original meaning,” Grewal said in the letter.
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