SEC Commissioner Hester Peirce warned that layer-2 blockchains working centralized matching engines could face alternate registration necessities whereas advocating for regulatory safety of really decentralized protocols.
Throughout an interview on The Gwart Present, 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 pinnacle of the SEC’s Crypto Process Pressure views protocols as units of guidelines that can not be owned, stating “no one owns” a very decentralized protocol as a result of “it’s on the market and anybody can use it.”
Layer-2 options introduce regulatory complexity, as they usually centralize transaction ordering to deal with Most Extractable Worth (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:
“You probably have an identical engine that’s managed by one entity that controls all of the items of that, then that appears much more like an alternate.”
She added that operators of such methods should contemplate that in the event that they’re transacting, they’re matching securities transactions. Nonetheless, the SEC desires to keep away from forcing really 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.”
Learning MEV
MEV options create this regulatory stress. Whereas centralized sequencers usually present higher retail execution by stopping front-running and sandwich assaults, they focus management over transaction ordering in ways in which could set off securities legislation obligations when dealing with tokenized securities.
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Peirce acknowledged monitoring MEV however prefers letting the neighborhood develop options earlier than intervening with regulation. She mentioned:
“I don’t need us essentially to leap in and remedy the issues, the MEV, the problems round MEV that the neighborhood itself can remedy.”
The excellence turns into vital as conventional securities migrate to blockchain infrastructure. Peirce desires clear boundaries defending builders who “write code” from registration necessities whereas making certain centralized intermediaries adjust to current 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 actually decentralized protocols obtain a regulatory secure 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 quite than expertise kind.
As tokenization of conventional securities accelerates, layer-2 operators should consider whether or not their centralized parts set off alternate registration obligations, notably when processing securities transactions by means of managed matching engines.