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Cryptocurrency venture capital firm Paradigm has criticized the US Securities and Exchange Commission’s attempt to redefine the term “exchange” which, if adopted, would place decentralized exchanges within its purview.
On June 8, the firm sent SEC Secretary Vanessa Countryman a lengthy 14-page letter regarding the regulator’s proposed redefinition of the term “exchange” in the Securities and Exchange Act of 1934.
The SEC plans to revise 89-year-old legislation to include decentralized exchanges (DEX) and decentralized finance (DeFi) in the definition of “exchange.” Since the term DEX contains the word “exchange”, the SEC wants to treat it the same way as securities or the stock exchange.
Through haphazard rulemaking, the SEC inappropriately attempts to bring cryptocurrency trading platforms, including DEXs, under its remit and regulate them as securities exchangeshttps://t.co/ibv2u1n9VU
— Rodrigo (@RSSH273) June 8, 2023
Paradigm, however, argues that fundamental differences between DEXs and exchanges make their treatment as “exchanges” under the Act “invalid and inconsistent.”
“It appears that after suing Coinbase for failing to do the impossible—registering as a securities exchange when it was unable to do so—the Commission now intends to force DEX to make the same Hobson choice.”
Paradigm Legal Counsel Rodrigo Seira commented that through this “haphazard rulemaking, the SEC is unduly trying to subjugate and regulate cryptocurrency trading platforms, including DEXs, like securities exchanges.”
In March 2022, the SEC proposed changes to the law to include systems that “suggest the use of non-solid trading interests and communication protocols to bring together buyers and sellers of securities.” In other words, any platforms that facilitate the exchange or exchange of digital assets.
Paradigm claims that DEXs do not serve as intermediaries and do not have “organizations, associations, or groups of individuals” that support the exchange.
Instead, they used market-making algorithms to balance pools of crypto-currency assets that potential buyers or sellers can freely access. In addition, it is claimed that DEXs run on self-executing code and smart contracts, and not on associations or groups of people.
Related: SEC crackdown on Binance and Coinbase spiked DeFi trading volumes by 444%
This week, the SEC unsuccessfully filed dual lawsuits against the world’s two largest cryptocurrency exchanges, Binance and Coinbase.
In addition, over the years of SEC action against cryptocurrencies, the agency has recognized at least 67 digital assets as securities. However, Congress has yet to enact any formal legislation for the cryptocurrency markets classifying them as such.
Meanwhile, it was reported that enforcement actions by the federal regulator against crypto companies rose by 183% in the 6 months after the FTX crash.