Paradigm, a crypto venture capital firm, has criticized the United States Securities and Exchange Commission (SEC) over its attempts to classify the term “exchange” to include decentralized exchanges (DEXes).
The U.S. SEC proposed an amendment to the 1934 Securities Exchange Act that includes DEXes and decentralized financing (DeFi) platforms within the definition of an “exchange.” This move is intended to treat DEXes in a manner similar to traditional securities or stock exchanges.
In a 14-page letter to the U.S. SEC secretary, Vanessa Countryman, Paradigm argued that classifying DEXes as exchanges under the Act is “invalid and incoherent” because of the fundamental differences between the two.
The venture capital stressed that DEXes operate without intermediaries and lack traditional exchange management entities such as organizations or associations. Instead, they rely on balanced pools of crypto assets accessed through market-making algorithms, smart contracts, and self-executing code.
The firm also points out the irony of the U.S. SEC potentially subjecting DEXes to a situation similar to what Coinbase faced. Paradigm noted that the securities regulator sued Coinbase for not being able to register as a securities exchange, even though it was impossible for them to do so.
Paradigm’s legal counsel, Rodrigo Seira, labelled the SEC’s proposal as an unwarranted “haphazard rulemaking.” He argued that the proposed amendments to the Act aim to include systems facilitating the trading or swapping of digital assets, leveraging non-firm trading interests and communication protocols.
Today, @paradigm commented on the @SECGov‘s proposed redefinition of “exchange”
Through haphazard rulemaking, the SEC inappropriately attempts to bring crypto trading platforms, including DEXs, under its remit and regulate them as securities exchangeshttps://t.co/ibv2u1n9VU
— Rodrigo (@RSSH273) June 8, 2023
The U.S. SEC’s proposal, introduced in March 2022, also seeks to introduce provisions for systems connecting buyers and sellers of securities, encompassing platforms enabling the trade or swap of digital assets.
Paradigm argues that the SEC’s rulemaking plan should be promptly withdrawn as it violates the Administrative Procedure Act, which protects the interests of the American public by preventing autocracy and arbitrary decision-making. They assert that the SEC’s proposed actions exceed its statutory competence and stray from its designated regulatory authority.
Though the U.S. Congress has not passed any official legislation categorizing cryptocurrency marketplaces as securities, the U.S. SEC has taken a firm stance on regulating the cryptocurrency industry. It has classified at least 67 digital assets as securities over the years. And recently, the securities regulator filed lawsuits against major crypto exchanges, Coinbase and Binance.
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