Coinbase Chief Legal Officer Paul Grewal and Base founder Jesse Pollak argued that Layer-2 (L2) Sequencers are infrastructure instead of exchanges.
Their statements are contrary to the current regulatory position, since SEC commissioner Hester Peirce has previously warned that centralized matching engines are confronted with the requirements for registration of exchange.
GREWAL compared the Sequencer of Base with Amazon Web Services in a post of 22 September, which stated that Layer-2-Blockchains work as a general processing code for infrastructure.
He argued that L2S “batches all transactions while he postpones all formal order interaction/matching rules for the smart contracts and fronts of an app.”
Pollak provided technical details to support the argument of the infrastructure and explains that the sequencer of Base is collecting user transactions, she orders first-in/first-out and they go to Ethereum Batchen for arrangement.
He emphasized that sequencers determine the order of transaction processing, but do not act as matching engines that buy and sell orders.
According to Pollak:
“Transaction -Matching or version takes place at the application level, within smart contracts. The sequencer ensures that these transactions are carried out in a consistent, orderly manner, but it is not decided that agreements or trading logic.”
He also noted that users can bypass the sequencer by transacting Ethereum on the basis of Ethereum, whereby the decentralization and resistance of the censorship of the Ethereum validator set are retained.
Seculating perspective
Peirce outlined various regulatory considerations during an interview of 8 September about the Gwart show, distinction between truly decentralized protocols and centralized entities with the help of blockchain technology.
She noted that Layer-2 solutions with centralized transaction order can be confronted with regulatory testing:
“If you have a matching engine that is controlled by an entity that arranges all documents, it looks much more like an exchange.”
Peirce added that operators should consider the registration of the exchange if they facilitate securities transactions through centralized systems.
Moreover, she emphasized the need to protect truly decentralized protocols, and describes it as a code that “no one possesses” and cannot register with regulators.
Pollak recognized the current centralization of base, which states that the platform has reached “phase 1 decentralization” and made blocking proposals possible without authorization. The team continues to work on “phase 2” decentralization and further decentralization of block construction.
The decoupling emphasized the need for a crypto control framework to solve problems such as the basis of the base.