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Coinbase once again came out swinging Monday against the U.S. Securities and Exchange Commission (SEC’s) yearslong attempt to expand a bureaucratic definition of the word “exchange,” which if successful would bring the DeFi ecosystem firmly under the regulator’s purview.

In an eight-page comment submitted to the SEC on Monday, Coinbase Chief Legal Office Paul Grewal chastised the potential rule change as “arbitrary” and “irrational” in several respects, and urged the agency to “abandon its effort” to apply the proposed rule to decentralized exchanges ( DEXs ).

Fundamental to Coinbase’s argument against the change is the SEC’s continued refusal to concede that DEXs—which are run by automated, on-chain software (aka smart contracts ) with little to no human management—are by definition incapable of complying with rules and standards designed for traditional securities exchanges like the New York Stock Exchange.

“DEXs cannot comply with registration and disclosure requirements designed for legacy financial exchanges managed by centralized companies,” Grewal wrote. “And even if DEXs could somehow comply with existing registration and disclosure rules, the Commission does not explain how SEC-registered DEXs could facilitate the trading of digital assets.”

Because of these apparent tensions, Coinbase implied in its letter to the SEC today, the agency may well be attempting to outlaw DEXs implicitly, without saying so.

“The SEC benefits from robust engagement from the public and will review all comments submitted during the open comment period. Generally, we respond to comments received as part of the final rulemaking and not beforehand," an agency spokesperson told Decrypt following the initial publication of this story.

Coinbase further accused the SEC of failing to complete a proper cost-benefit analysis of the proposed rule change. That’s due to the fact that the regulator has only stated in blanket terms that it would regulate exchanges that deal in “crypto asset securities,” without defining which sorts of digital assets constitute securities and which do not.

The SEC’s longstanding refusal to draw such a line—between which cryptocurrencies it views as securities, and which it does not—remains one of the crypto industry’s greatest grievances with the agency. Insteading of putting forth such a framework, the SEC has opted to sue crypto projects it alleges constitute illegal securities offerings, one at a time.

The regulator has even, in recent months, appeared to flip-flop on its own views of certain crypto assets. For over a year, for example, the SEC reportedly secretly considered Ethereum to be a security. Then, in May, the agency abruptly changed course, approving the trade of spot Ethereum ETFs on Wall Street.

Because the SEC has not clearly defined which cryptocurrencies it considers to be securities, Coinbase wrote today, it cannot possibly have properly calculated an accurate cost-benefit analysis determining how much financial activity would fall under its purview if DEXs were regulated like securities exchanges.

“The SEC cannot rationally make these calculations without a single, stable view on which digital assets are subject to the securities laws,” Grewal wrote.

Thus, the SEC “must withdraw the proposal, gather the information necessary to conduct a rational cost-benefit analysis, attempt to correct its existing faulty assumptions and analysis, and permit a further round of comment on any modified proposal the Commission may advance,” Coinbase said.

In 2023, when the SEC first introduced its proposed change to the definition of “exchange,” agency chair Gary Gensler bluntly laid out his position that most crypto tokens, and thus most DEXs, were operating in flagrant violation of existing securities laws.

“As I’ve said numerous times, the vast majority of crypto tokens are securities,” Gensler said at the time. “Calling yourself a DeFi platform is not an excuse to defy the securities laws.”

Since then, crypto companies and projects have sought, in a protracted back-and-forth, to prevent the rule change from passing, viewing it as an existential threat to DeFi.

Last month, Uniswap Labs, the firm behind a leading DEX that was threatened with a lawsuit by the SEC in April, sent a letter to the regulator arguing that it must back down from attempts to regulate DeFi. That came in the wake of a bombshell U.S. Supreme Court ruling that severely curtailed the ability of federal agencies to self-define the boundaries of their regulatory powers.

Editor's note: This story was updated after publication to include a comment from the SEC and additional context.