- June 12, 2023
- Posted by: [email protected]
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Crypto venture firm Paradigm has criticized the attempt by the United States Securities and Exchange Commission (SEC) to redefine the term “exchange” in a way that would subject decentralized exchanges (DEXes) to its oversight. In a 14-page letter sent to the SEC secretary, Paradigm expressed its concerns about the regulator’s proposed revision of the 1934 Securities Exchange Act.
The SEC intends to expand the existing legislation to include DEXes and decentralized finance (DeFi) within the definition of an “exchange.” This move is motivated by the inclusion of the word “exchange” in DEX, which the SEC wants to interpret as meaning that DEXes should be treated like securities or stock exchanges.
Paradigm, however, argues that there are significant differences between DEXes and traditional exchanges that make treating them as “exchanges” under the Act both “invalid and incoherent.” The firm criticizes the SEC’s approach, suggesting that it is trying to force DEXes into a situation similar to that of Coinbase, which was sued by the SEC for not registering as a securities exchange despite being incapable of doing so.
Rodrigo Seira, Paradigm’s legal counsel, stated that the SEC’s attempt to bring crypto trading platforms, including DEXes, under its regulatory purview and treat them as securities exchanges through “haphazard rulemaking” is inappropriate.
Paradigm highlights that DEXes do not function as intermediaries and lack any form of centralized organization. Instead, they rely on market-making algorithms to maintain balanced pools of crypto assets, which are freely accessible to potential buyers and sellers. Furthermore, DEXes operate through self-executing code and smart contracts, rather than through traditional associations or groups of people.
The SEC has recently taken strong action against major crypto exchanges, such as Binance and Coinbase, through twin lawsuits. Over the years, the SEC has classified at least 67 digital assets as securities, while Congress has not yet passed any official legislation specifically addressing the classification of crypto assets.
Additionally, enforcement actions by the SEC targeting crypto companies have increased significantly, rising by 183% in the six months following the collapse of FTX, according to reports by Cointelegraph.
Paradigm firmly opposes the SEC’s attempt to redefine the term “exchange” in a way that would bring DEXes under its regulatory oversight, arguing that the fundamental differences between DEXes and traditional exchanges make such categorization inappropriate and illogical.
