Coinbase Defends Base Network Amid Regulatory Scrutiny

Coinbase's Chief Legal Officer, Paul Grewal, is actively defending the company's Ethereum Layer-2 network, Base, against potential classification as a securities exchange. He argues that Base serves as fundamental blockchain infrastructure, not a platform for directly matching securities trades.

Key Arguments

• Infrastructure, Not Exchange: Grewal emphasizes that Base is "just a normal blockchain," a Layer-2 solution focused on providing infrastructure. He claims it's not involved in directly matching buyers and sellers of securities.
• Application-Level Matching: According to Grewal, the matching of transactions occurs within applications built on top of Base, such as decentralized exchanges (DEXs) or centralized order books. The Layer-2 itself doesn't perform this function.
• Decentralization Efforts: Coinbase is actively exploring ways to further decentralize Base, including the potential launch of a native network token. This move aligns with a broader push for greater community involvement and less reliance on centralized control.

The SEC defines an exchange as a marketplace that matches buyers and sellers of securities. SEC Commissioner Hester Peirce has previously raised concerns about centralized sequencers in Layer-2 networks potentially resembling exchange matching engines. Ripple CTO David Schwartz supports Grewal’s position, comparing Layer-2 networks to cloud providers that host exchange code but aren’t themselves classified as exchanges.

Base, launched in 2023, has quickly gained traction as a low-cost, developer-friendly scaling solution for Ethereum. Grewal warns that regulating Layer-2 infrastructure as an exchange could stifle innovation and slow down ecosystem growth.

Base is also exploring an open-source bridge with Solana, aiming to foster interoperability between ERC-20 and SPL tokens.

Base's DeFi Growth

Base has experienced significant growth in the decentralized finance (DeFi) space. While Ethereum still dominates with $86.3 billion in Total Value Locked (TVL), Base has emerged as a notable player. Base boasts $4.83 billion in TVL across more than 700 protocols, with stablecoins driving much of the activity. Daily DEX volumes are approaching $2 billion, with perpetuals trading adding another $1.1 billion, positioning Base as a highly liquid Layer-2 solution. Much of the activity comes from protocols such as Aerodrome, Uniswap, Aave, and Spark.

Key Takeaways

• Coinbase is actively lobbying to avoid regulatory scrutiny of its Base network.
• Base is demonstrating significant growth in DeFi, challenging existing Layer-2 solutions.
• Future decentralization efforts, including a potential token launch, could impact Base's regulatory outlook.