Crypto Venture Firm Paradigm Criticizes SEC’s Attempt to Classify DEXs as Exchanges

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Key Takeaways

  • SEC’s proposed revision of the 1934 Securities Exchange Act seeks to include DEXes and DeFi under the gambit of “exchange.”
  • Paradigm argues that DEXs and exchanges possess fundamental differences, making their treatment as “exchanges” under the Act “invalid and incoherent.”

Paradigm, a prominent crypto venture capital firm, has strongly criticized the U.S. Securities and Exchange Commission (SEC) for its recent attempt to redefine the term “exchange.” In a detailed 14-page letter sent on June 8, Paradigm expressed concerns regarding the SEC’s proposed revision of the 1934 Securities Exchange Act, which seeks to include decentralized exchanges (DEXes) and decentralized finance (DeFi) within the definition of “exchange.”

The SEC’s move comes as it plans to regulate DEXs in a similar manner to traditional securities or stock exchanges due to the presence of the term “exchange” in their names. However, Paradigm argues that DEXs and exchanges possess fundamental differences, making their treatment as “exchanges” under the Act both “invalid and incoherent.”

Rodrigo Seira, legal counsel for Paradigm, strongly criticized the SEC’s rulemaking, stating that it inappropriately seeks to bring crypto trading platforms, including DEXs, under its jurisdiction and regulate them as securities exchanges. Seira further highlighted that the SEC’s previous attempt to include platforms facilitating digital asset exchange or swaps already faced opposition, and the inclusion of DEXs exacerbates the issue.

Paradigm firmly asserts that DEXs do not function as intermediaries and lack the organizational structure associated with traditional exchanges. Instead, DEXs rely on market-making algorithms, self-executing code, and smart contracts to enable buyers and sellers to freely access pools of crypto assets. By operating on decentralized networks, DEXs aim to provide users with increased security, transparency, and control over their digital assets.

The SEC had previously proposed changes to the Securities Exchange Act in March 2022, with the intention of incorporating platforms that facilitate digital asset exchange or swaps. However, Paradigm argues that the distinguishing features of DEXs, such as their lack of intermediation and organizational hierarchy, make them fundamentally different from traditional exchanges.

Paradigm’s criticism stems from the concern that the SEC’s attempt to classify DEXs as exchanges under the Act would impose unnecessary and burdensome regulatory requirements on these platforms. This, in turn, could stifle innovation in the rapidly evolving DeFi space and hinder the potential benefits it offers to market participants.

Paradigm’s scrutiny on SEC also comes amidst the regulatory body immensely cracking down on crypto. In the last seven days, SEC has issued two lawsuits against crypto’s biggest names-Binance and Coinbase, over their alleged unregistered offerings.

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Saniya Raahath
Saniya Raahath

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