SEC does not have 'authority to ban' an industry: Coinbase

Coinbase is the latest company to push back against the SEC’s proposed definition change.

Reopened in April, the SEC’s public comment period closed on Tuesday.

In 2022, the SEC moved to expand the regulator’s definition of an exchange. In April, the SEC said that it planned to once again open the comment period of the proposal because it planned to fold in DeFi and crypto.

At the time, SEC Chair Gary Gensler said the maneuver would “help address comments on the proposal from various market participants, particularly those in the crypto markets.

Added Gensler: “Make no mistake: Many crypto trading platforms already come under the current definition of an exchange and thus have an existing duty to comply with the securities laws.”

Last week, the SEC filed a lawsuit against Coinbase alleging the crypto platform is operating as an unregistered exchange — and offering unregistered securities.

“As the Supreme Court has repeatedly held, an agency’s authority to regulate a particular industry does not include the authority to ban that industry, absent clear Congressional authorization,” Coinbase said in a letter to the SEC.

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Coinbase on Tuesday pushed back against the SEC’s bid to include crypto and DeFi, specifically, under its planned updated exchanges definition, which also applies to traditional finance market makers. Coinbase said the company is especially concerned with how the proposal could impact decentralized exchanges (DEXs).

“The proposed rule, as applied to DEXs, would be just such an impossible requirement,” Coinbase said.

“When creating a DEX, a software developer typically writes the code that creates the DEX and then publishes the code onto a public, permissionless blockchain, along with a mechanism for widely distributing the governance tokens that enable holders to alter select elements of the DEX going forward,” the letter said.

Blockchain Association among SEC critics

The Blockchain Association, DeFi Education Fund (DEF), Paradigm, and Republicans from the House Financial Services Committee have all criticized the SEC’s proposed exchange definition, with some asking the SEC to withdraw it.

Regarding DEXs, Paradigm wrote that “a DEX, particularly those using automated market maker mechanisms, involves no person or entity playing an intermediating role between buyers and sellers — instead, it uses an algorithm to balance pools of cryptoassets that potential buyers or sellers can freely access.”

And Tavonia Evans of the National Policy Network of Women in Color in Blockchain said, “The proposed rule does not provide clear guidelines on how it applies to DEXs that do not facilitate crypto-to-fiat transactions. I urge the SEC to provide explicit guidance on this matter to ensure that these DEXs can operate within the regulatory framework.”

But DEXs aren’t the sole concern.

“Simply put, the proposed rulemaking makes the SEC’s position clear: Centralize, shut down, or get out of the United States,” said Miller Whitehouse-Levine, CEO of DEF.

Paradigm urged the SEC to “withdraw” the proposed redefinition.

“Accordingly, we write to request that the Commission withdraw its proposed redefinition of ‘exchange’ and begin its consideration of how to adapt its regulations in the DeFi context anew — after rigorous economic analysis, genuine, broad engagement with the industry, and a close look at the limits of its statutory jurisdiction,” Paradigm wrote.

Another argument made by the Blockchain Association, Paradigm and Coinbase: The SEC has violated the Administrative Procedures Act in the regulator’s process.

The APA both guides and governs how government agencies issue and develop regulations, including requirements and allows the public to provide feedback and commentary – as all three listed above have.

“The rule change is vague and ambiguous, and the range of activities that may be captured within its scope are not yet fully fleshed out,” the Blockchain Association said.

Paradigm called the SEC’s approach to the proposal “haphazard.”

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