Recently, Coinbase issued its third letter to the SEC over the agency’s proposed changes in the definition of a national securities exchange. This latest submission underlined Coinbase’s persistence with ongoing concerns it had about the SEC’s approach, specifically, its cost-benefit analysis of the proposed rule changes.
Paul Grewal, Coinbase’s chief legal officer, addressed the SEC’s Chair, Ms. Countryman, emphasizing the critical flaws in the Commission’s analysis of the new rule’s economic impacts. The proposal aims to redefine “exchange” under Rule 3b-16 of the Exchange Act of 1934, potentially bringing decentralized exchanges (DEXs) into a regulatory framework designed for traditional financial markets.
Coinbase’s letter argues that this expansion threatens innovation by imposing outdated requirements on DEXs, possibly stifling their operations and leading to significant unintended consequences for the market.
The core complaint by Coinbase is that the SEC appears to not have looked hard enough and learned how a DEX works. As the letter states, the SEC has consistently admitted to being ignorant about the central facts of a DEX, such as operational mechanics and compliance costs it would be subject to.
This lack of information undermines the SEC’s attempt to balance the rule’s benefits against its costs, leading to what Coinbase describes as a fundamentally flawed cost-benefit analysis.
Coinbase Highlights Flaws in SEC’s Cost-Benefit Analysis
The letter also criticizes the SEC for relying on inappropriate baselines for cost comparison. Instead of using relevant data from similar entities, the Commission has drawn comparisons to traditional financial institutions that are fundamentally different from DEXs.
This approach, according to Coinbase, results in an inaccurate estimation of the compliance burden DEXs would incur. The SEC’s methodology fails to account for the unique operational characteristics of decentralized platforms, which operate without central intermediaries and face distinct regulatory challenges.
Furthermore, Coinbase points out that the SEC has not provided a clear definition of what constitutes “security” in the context of digital assets, adding another layer of uncertainty for DEXs. Without a fair, fixed framework of analysis regarding which digital assets are considered securities, the scope of the proposed rule remains uncertain, and the compliance needs for DEXs might indeed drive them away from the U.S. market.
The letter implores the SEC to review its approach, a minimum step to withdraw the rule, and revise it to include more comprehensive feedback from all stakeholders. As Coinbase pointed out, unless these existential issues are resolved, the risk is very real that this rule will do more to undermine innovation and weaken the competitive advantage of America’s technology on the global stage.
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