Coinbase finds flawed analysis in SEC's proposed exchange definition

Coinbase has submitted a new letter to the United States Securities and Exchange Commission (SEC) on that agency’s proposed changes to the definitions of a national securities exchange. This is the third comment letter from Coinbase and addresses the SEC’s cost-benefit analysis of its proposed changes.

The SEC lacks the necessary information to conduct a cost-benefit analysis and depends on irrational arguments in its place, Coinbase argues. The SEC should at least withdraw the proposal and start over again after it has done its research, the letter’s author, Coinbase chief legal officer Paul Grewal said.

SEC operating with little information

A cost-benefit analysis is required for the proposal under the Administrative Procedure Act and Exchange Act of 1934, Grewal said. The letter went on to list the information that the SEC admits to not knowing, starting with the definition of a “crypto asset security” and the number of exchanges operating on the market, and concludes:

“It is accordingly impossible to see how the Commission could possibly have discharged its statutory and procedural obligations to regulate in light of the best available information when the Commission admits that on many key issues it has little or no information at all.”

Grewal continues that decentralized exchanges (DEXs) would be unable to meet the proposed disclosure requirements for a national securities exchange, and it would be hard for a DEX or centralized crypto asset exchange to operate under the proposed definition:

“The SEC currently limits a registered exchange to offering only securities. But there are almost no registered digital-asset securities, because digital-asset developers separately cannot comply with the Commission’s inapt issuer regulations.”

Without a clear understanding of what constitutes a crypto asset security, no cost-benefit analysis is possible, Grewal adds. He also dismisses the SEC’s suggestion that a cost baseline for DEXs could be assumed from that of other types of exchanges.

The latest in a stream of criticism of the SEC proposal

The SEC proposal has been around since 2022. Its first iteration did not mention DEXs, but, as Coin Center pointed out, by bringing communication protocol systems under the definition of exchange, the SEC could expect DEXs to register with it. The SEC later made its intention to extend the proposal to decentralized finance (DeFi) clear.

The Blockchain Association and Republican members of the House of Representatives Committee on Financial Services also filed comments criticizing the proposal. In addition, DEX Uniswap suggested in a comment in July that the US Supreme Court’s June Chevron decision implies that the SEC was proposing the new definition against “a legal backdrop that no longer exists.”