Coinbase Continues Its Clash with the US SEC, Urges the Regulator to Withdraw Its Rule on DEXs

This ongoing dispute could further define the legal boundaries for decentralized finance (DeFi) operations in the United States.

Coinbase has urged the US Securities and Exchange Commission (SEC) to withdraw its rule proposal on decentralized exchanges (DEXs), arguing that the regulator is overstepping its authority and stifling innovation in crypto markets.

In a letter to the SEC on Monday, Coinbase Chief Legal Officer Paul Grewal highlighted the agency’s “irrational” expansion of the term ‘exchange,’ which he says was designed in part to target DEXs.

“Coinbase remains concerned about the Commission’s proposed expansion of the term ‘exchange’—which the SEC’s Reopening has confirmed was designed in part to target decentralized exchanges (DEXs) that facilitate trading in digital assets,” the letter opened.

If passed, this rule, which dates back to January 2022, would compel DeFi projects to register as alternative trading systems.

Coinbase’s bone of contention is that the proposal would saddle DEXs with impossible-to-satisfy requirements, among other measures that would effectively kill innovation in crypto markets.

The Coinbase CLO referred to the demise of the Chevron deference, achieved by Paul Clement, one member of the Coinbase board of directors. According to Grewal, Clement’s success mirrors the unlikelihood that reviewing courts will agree with the regulator’s sweeping attempt to stretch the Exchange Act’s key terms far beyond their original meaning.

Coinbase, therefore, urges the commission to withdraw and re-notice the rule and allow meaningful stakeholder input.

The SEC vs. Coinbase Saga Continues

The Gary Gensler-led SEC has maintained that crypto platforms must register with the agency. He says they qualify as exchanges, whether centralized or decentralized.

On this stance, the regulator charged Coinbase, among other platforms like Uniswap Labs, for operating as unregistered exchanges. The case set a precedent imposing significant restrictions under the pretext of consumer protection and market integrity.

Coinbase’s stand is that the regulator is overstepping its regulatory authority without clear guidelines on what constitutes security in the first place. The exchange aimed to use the SEC’s documents to demonstrate this lack of clarity but hit a brick wall in its request.

Coinbase’s legal challenges extend beyond the SEC. The exchange is also in conflict with the Federal Election Commission (FEC) after digital asset critic Molly White and Public Citizen accused Coinbase of violating FEC laws with its $25 million donation to Fairshake Super PAC.

It also opposes the Commodities Futures Trading Commission’s proposed prediction market rule. Coinbase argues this rule misinterprets the Commodity Exchange Act.

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