Coinbase has become the latest entity to push back against the United States Securities and Exchange Commission’s proposed definition change. 

The SEC had moved to expand its definition of an exchange in 2022. 

What’s The SEC’s Problem With Crypto?

The Securities and Exchange Commission has been relentless in its dogged pursuit of everything crypto. In its latest salvo, the regulatory body sued Coinbase in a New York federal court. In its lawsuit, the agency alleged that Coinbase acted as an unregistered broker and exchange and demanded that it be “permanently restrained and enjoined” from doing so. The lawsuit came just a day after the SEC had sued Binance, the world’s largest cryptocurrency exchange, and its CEO, Changpeng Zhao. The SEC in its press release, stated, 

“Since 2019, Coinbase has been engaging in an unregistered securities offering through its staking-as-a-service program, which allows customers to earn profits from the “proof of stake” mechanisms of certain blockchains and Coinbase’s efforts.”

The crypto markets have been fairly nervous since the Securities and Exchange Commission filed a lawsuit against Binance and its CEO, Changpeng Zhao, just a day before its action against Coinbase. According to the SEC, Binance mishandled funds and lied to investors and regulators about operations, a claim Binance refutes. 

Coinbase Demands Clarity 

Coinbase has pushed back against the Securities and Exchange Commission, urging it to provide better clarity for the crypto industry. The SEC has responded to Coinbase’s call for clarity, stating that it requires four months or 120 days to respond. The response comes after a barrage of court filings by both, Coinbase and the SEC. Coinbase had filed a writ of Mandamus against the regulatory body after it stated that it was “in no hurry” to respond to the exchange’s demand for regulatory clarity. Coinbase had accused the agency of wilfully ignoring its request for immediate clarity. Prior to this, the SEC had responded to a previous petition stating that it would not give in to the exchange’s demands. 

SEC’s Proposed Definition Change 

In 2022, the Securities and Exchange Commission moved to expand its definition of an exchange. In April 2023, the agency reopened its comment period of the proposal, adding that this was needed as it planned to “fold in DeFi and crypto.” SEC Chair Gary Gensler stated that this would help address comments on proposals from market participants, particularly those associated with the crypto markets. 

Coinbase has been pushing back against the SEC, especially since the agency sued the exchange, alleging it was offering its users unregistered securities. In a letter to the SEC, Coinbase stated that it has no authority to ban an entire industry. 

“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 also criticized the SEC’s decision to include crypto and DeFi under its planned exchanges definition. The updated definition also applies to more traditional market makers. The exchange stated that it was especially concerned with the proposal’s potential impact on decentralized exchanges (DEX). In its letter to the SEC, the exchange stated, 

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

Criticism From All Quarters 

The SEC’s proposed exchange definition has come under heavy criticism from all quarters. Critics include the Blockchain Association, Paradigm, DeFi Education Fund (DEF), and Republicans from the House Financial Services Committee, some of whom have urged the SEC to withdraw the proposal. Paradigm stated that a DEX, particularly one using an automated market maker mechanism, does not involve any intermediary between buyers and sellers, adding that it used algorithms to balance crypto pools. It urged the agency to withdraw the proposal, stating, 

“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, the Blockchain Association, and Coinbase have also argued that the SEC has violated the Administrative Procedures Act (APA). The APA governs and guides how agencies devise and implement regulations. 

“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.”

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

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