Coinbase opposes SEC's idea to regulate decentralized platforms as exchanges

What’s new? The chief legal officer of the largest US centralized crypto exchange (CEX) Coinbase, Paul Grewal, said the Securities and Exchange Commission (SEC) should withdraw its proposal that would bring decentralized exchanges (DEXs) under its jurisdiction. The rule was first introduced in January 2022 and reopened for comment in April. It proposes to expand the term “exchange” to include DEXs.

Legal officer's submission

What else is known? If this amendment is passed, decentralized projects may be required to register as alternative trading systems. The initiative has received hundreds of comment letters from lawmakers, the crypto industry and traditional stock exchanges, including Nasdaq, over the course of two and a half years.

Paul Grewal called the SEC's assumption that DEXs can comply on par with more traditional exchanges “irrational.” In particular, decentralized platforms cannot comply with disclosure requirements that were designed for exchanges run by a centralized authority.

SEC Chairman Gary Gensler has repeatedly stated that crypto platforms must register with the agency and that most cryptocurrencies are securities. In April 2023, Gensler said that most trading platforms meet the definition of an exchange, “whether they call themselves centralized or decentralized.”

Also last year, the SEC sued Coinbase for operating without registering as an exchange and offering unregistered securities in the form of tokens. The SEC later sent a notice of preparation for a lawsuit against decentralized marketplace Uniswap.

Grewal noted in his appeal that in June, the Supreme Court struck down the Chevron doctrine, which required courts to rely on federal agencies to interpret ambiguous laws. The Coinbase lawyer said the overturning of that doctrine underscores that courts are unlikely to agree with the SEC's attempt to expand Exchange Act's key terms.

In June, the Uniswap team also urged the SEC to abandon its initiative to regulate DeFi platforms as exchanges. It said the breadth of the proposed amendment "has no discernible limits," and thus the SEC would continue to initiate litigation against crypto firms. And given the repeal of the Chevron doctrine, courts will not explicitly rely on the SEC to interpret the definition of an exchange.