Paradigm Slams SEC’s Proposed Exchange Redefinition

Blockchain investment firm Paradigm has issued a scathing comment on the Securities and Exchange Commission’s (SEC) proposed redefinition of “exchange,” claiming that it is a haphazard attempt to regulate crypto trading platforms, including decentralized exchanges (DEXs), as securities exchanges. Paradigm argues that the SEC’s approach demonstrates an inappropriate expansion of jurisdiction and violates key legal protections, demanding that the proposal be promptly withdrawn.

Paradigm commented on the SEC’s proposed redefinition of “exchange.”: the SEC inappropriately attempts to bring crypto trading platforms, including DEXs, under its remit and regulate them as securities exchanges. It violates the rulemaking procedures of the Administrative…

— Wu Blockchain (@WuBlockchain) June 9, 2023

Differences between DEXs and Exchanges

In its comment letter, Paradigm emphasizes that DEXs differ fundamentally from traditional exchanges, rendering the treatment of both as equivalent incoherent. The defining characteristics of regulated exchanges, according to the Exchange Act’s definition, involve serving as intermediaries in securities transactions and being operated by specific entities capable of collective action. However, DEXs lack these features, relying instead on algorithms and self-executing code to facilitate transactions without intermediaries or centralized control. Paradigm asserts that, by any objective analysis, DEXs do not fall within the scope of the Exchange Act, making the SEC’s proposal beyond its statutory jurisdiction.

Furthermore, Paradigm criticizes the SEC’s proposal for introducing arbitrary and capricious distinctions among developing technologies and using vague and ambiguous terminology. The broad reach of the proposed definition of “exchange” could erroneously encompass entities unrelated to exchanges, such as Bloomberg’s messaging service. The SEC’s attempt to rectify this by exempting such services through blunt force is deemed arbitrary and capricious by Paradigm.

The comment also highlights procedural flaws in the SEC’s rulemaking process. The original notice issued on March 18, 2022, failed to adequately address decentralized finance (DeFi) and was accompanied by a short, 30-day comment period without proper cost-benefit analysis. Although the SEC reopened the comment period in May 2022 and again in April 2023, these extensions do not rectify the procedural shortcomings of the initial notice. Paradigm argues that the SEC’s revelation of its intent to regulate DEXs in the April 2023 notice indicated a closed-minded approach, violating the Administrative Procedure Act’s requirement for fair public comment opportunities. Paradigm asserts that the SEC’s acknowledgment of errors does not absolve them of their violation of procedural standards.

Paradigm deems the proposed rules fundamentally flawed on both substantive and procedural grounds. The firm calls for the swift withdrawal of the proposal, urging the SEC to reconsider its approach to the regulation of DEXs and ensure fair and transparent rulemaking procedures.