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Coinbase is against the SEC’s plan to regulate decentralized exchanges

Coinbase has strongly opposed the U.S. Securities and Exchange Commission’s (SEC) plan to expand the definition of “exchange” to include decentralized exchanges (DEXs). The cryptocurrency exchange says the plan is basically flawed because it doesn’t do a good cost-benefit analysis and puts too many unrealistic requirements on DEXs, which could stop new ideas from coming up and force these platforms to leave the U.S. market.

The U.S. Securities and Exchange Commission (SEC) wants to include decentralized exchanges (DEXs) in the meaning of “exchange.” Coinbase is in strong opposition to this plan. In a series of letters to the SEC, Coinbase has said that the proposed changes are basically flawed, both in how they are thought out and how they are put into action, and that they could have very bad effects on the bitcoin market as a whole.

The main point of Coinbase’s case is that the SEC’s plan doesn’t have a good cost-benefit study, which is a very important requirement under the Exchange Act of 1934 and the Administrative Procedure Act. Coinbase’s Chief Legal Officer, Paul Grewal, said that the SEC doesn’t have enough information to do this kind of research because it hasn’t spelled out what “crypto asset security” means or fully understood how DEXs work. Any effort to control DEXs under the proposed framework would be wrong and could even be harmful without this important knowledge.

The SEC thinks that DEXs could be controlled in the same way as standard, centralized exchanges, which is something that Coinbase doesn’t agree with. The business says that because DEXs don’t have a central authority, they can’t follow the rules for registration and transparency that are in place for centralized organizations. Coinbase says that this legal gap would force “anachronistic and impossible-to-satisfy requirements” on DEXs, which could force them to leave the U.S. market completely. Such a result could stop new ideas from happening and make the American financial sector less competitive, since businesses and producers might have to move their operations overseas.

In its letters, Coinbase also talked about a recent Supreme Court decision called Loper Bright Enterprises v. Raimondo. This decision reversed the Chevron reliance. It’s less likely that judges will support the SEC’s attempt to include DEXs in the Exchange Act, especially since the SEC itself has said it doesn’t know enough about how DEXs work. The exchange said the SEC was wrong to base its cost predictions on standard, centralized entities, which are very different from decentralized platforms. This, the exchange said, made the SEC’s compliance cost assumptions unrealistic and misleading.

Because of these worries, Coinbase has asked the SEC to pull the proposed rule and study its effects on the economy more carefully before taking any further regulation action. The exchange said that the rule as it is now would probably cause DEXs to leave the U.S. market, which would keep American users from getting the benefits of decentralized financial systems, like more openness and lower transaction costs.

The SEC needs to come up with a clear and uniform description of what a security is in the digital asset market. This is something that the agency has not yet done. Until then, trying to regulate DEXs based on this plan would be too soon and could hurt the future of the U.S. bitcoin market.

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