SEC’s Peirce warns L2 chains with centralized sequencers may face exchange registration

SEC Commissioner Hester Peirce warned that layer-2 blockchains operating centralized matching engines whitethorn look speech registration requirements portion advocating for regulatory extortion of genuinely decentralized protocols.

During an interview connected The Gwart Show, Peirce noted her imaginativeness for crypto regulation, drafting crisp distinctions betwixt immutable codification operating connected decentralized networks and centralized entities utilizing blockchain exertion to facilitate trading.

Decentralized protocols cannot beryllium owned

The caput of the SEC’s Crypto Task Force views protocols arsenic sets of rules that cannot beryllium owned, stating “nobody owns” a genuinely decentralized protocol due to the fact that “it’s retired determination and anyone tin usage it.”

Layer-2 solutions present regulatory complexity, arsenic they often centralize transaction ordering to code Maximum Extractable Value (MEV) issues.

These chains tally matching engines that power transaction sequencing, departing from the distributed node architecture that defines accepted blockchain censorship resistance.

Pierce said:

“If you person a matching motor that’s controlled by 1 entity that controls each the pieces of that, past that looks a batch much similar an exchange.”

She added that operators of specified systems volition person to see that if they’re transacting, they’re matching securities transactions. However, the SEC wants to avoid forcing genuinely decentralized protocols to register arsenic exchanges oregon broker-dealers.

Peirce noted the value of protecting immutable astute contracts deployed connected sufficiently decentralized layer-1 networks, describing them arsenic “code conscionable doing its happening retired there” that “can’t registry with us.”

Studying MEV

MEV solutions make this regulatory tension. While centralized sequencers often supply amended retail execution by preventing front-running and sandwich attacks, they ore power implicit transaction ordering successful ways that whitethorn trigger securities instrumentality obligations erstwhile handling tokenized securities.

Peirce acknowledged monitoring MEV but prefers letting the assemblage make solutions earlier intervening with regulation. She said:

“I don’t privation america needfully to leap successful and lick the problems, the MEV, the issues astir MEV that the assemblage itself tin solve.”

The favoritism becomes captious arsenic accepted securities migrate to blockchain infrastructure. Peirce wants wide boundaries protecting developers who “write code” from registration requirements portion ensuring centralized intermediaries comply with existing frameworks.

This attack reflects Peirce’s broader regulatory doctrine of principles-based oversight that preserves innovation portion maintaining capitalist protection.

She advocates for rules that separate betwixt codification operating autonomously and entities utilizing codification to execute regulated activities.

The commissioner’s model suggests that genuinely decentralized protocols person a regulatory harmless harbor portion layer-2 chains with centralized power mechanisms look accepted intermediary oversight.

This backdrop creates a spectrum wherever regulatory requirements correlate with centralization levels alternatively than exertion type.

As tokenization of accepted securities accelerates, layer-2 operators indispensable measure whether their centralized components trigger speech registration obligations, peculiarly erstwhile processing securities transactions done controlled matching engines.

The station SEC’s Peirce warns L2 chains with centralized sequencers whitethorn look speech registration appeared archetypal connected CryptoSlate.