SEC’s Peirce warns L2 chains with centralized sequencers may face exchange registration
SEC Commissioner Hester Peirce warned that layer-2 blockchains working centralized matching engines may face exchange registration necessities whereas advocating for regulatory safety of actually decentralized protocols.
During an interview on The Gwart Show, Peirce famous her imaginative and prescient for crypto regulation, drawing sharp distinctions between immutable code working on decentralized networks and centralized entities utilizing blockchain expertise to facilitate buying and selling.
Decentralized protocols can’t be owned
The head of the SEC’s Crypto Task Force views protocols as units of guidelines that can not be owned, stating “no person owns” a really decentralized protocol as a result of “it’s on the market and anybody can use it.”
Layer-2 options introduce regulatory complexity, as they typically centralize transaction ordering to handle Maximum Extractable Value (MEV) points.
These chains run matching engines that management transaction sequencing, departing from the distributed node structure that defines conventional blockchain censorship resistance.
Pierce mentioned:
“If you’ve got an identical engine that’s managed by one entity that controls all of the items of that, then that appears much more like an exchange.”
She added that operators of such programs should contemplate that in the event that they’re transacting, they’re matching securities transactions. However, the SEC desires to avoid forcing truly decentralized protocols to register as exchanges or broker-dealers.
Peirce famous the significance of defending immutable sensible contracts deployed on sufficiently decentralized layer-1 networks, describing them as “code simply doing its factor on the market” that “can’t register with us.”
Studying MEV
MEV options create this regulatory rigidity. While centralized sequencers typically present higher retail execution by stopping front-running and sandwich assaults, they focus management over transaction ordering in ways in which may set off securities legislation obligations when dealing with tokenized securities.
Peirce acknowledged monitoring MEV however prefers letting the group develop options earlier than intervening with regulation. She mentioned:
“I don’t need us essentially to leap in and clear up the issues, the MEV, the problems round MEV that the group itself can clear up.”
The distinction turns into crucial as conventional securities migrate to blockchain infrastructure. Peirce desires clear boundaries defending builders who “write code” from registration necessities whereas guaranteeing centralized intermediaries comply with present frameworks.
This method displays Peirce’s broader regulatory philosophy of principles-based oversight that preserves innovation whereas sustaining investor safety.
She advocates for guidelines that distinguish between code working autonomously and entities utilizing code to carry out regulated actions.
The commissioner’s framework suggests that really decentralized protocols obtain a regulatory protected harbor whereas layer-2 chains with centralized management mechanisms face conventional middleman oversight.
This backdrop creates a spectrum the place regulatory necessities correlate with centralization ranges relatively than expertise sort.
As tokenization of conventional securities accelerates, layer-2 operators should consider whether or not their centralized parts set off exchange registration obligations, significantly when processing securities transactions by means of managed matching engines.
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