SEC Commissioner Hester Peirce warned that Layer-2 Blockchains operating that centralized matching engines can be confronted with exchange registration requirements, while the argument for legal protection of truly decentralized protocols.
During an interview on the Gwart show, Peirce noted that its vision of crypto regulation, making sharp distinctions between unchanging code that operates on decentralized networks and centralized entities using blockchain technology to facilitate trade.
Decentralized protocols cannot be owned by
The head of the Crypto Task Force of the SEC regards protocols as sets of rules that cannot be owned, stating that “no one owns” a real decentralized protocol because “it is there and someone can use it.”
Layer-2 solutions introduce the complexity of the regulations, because they often centralize the transaction to tackle problems with the maximum extra-up value (MEV).
These chains run matching engines that arrange transactical interviews that depart from the distributed junction architecture that defines traditional blockchain censure resistance.
Pierce said:
“If you have a matching engine that is controlled by an entity that arranges all documents, it looks much more like an exchange.”
She added that operators of such systems should consider that if they transact transactions, they correspond to securities transactions. However, the SEC wants to prevent it from being forced to register as stock exchanges or broker’s dealers.
Peirce noticed the importance of protecting unchanging smart contracts that were used for sufficiently decentralized Layer-1 networks, in which they are described as “Code that just does his thing” that “cannot register with us”.
MEV Study
MEV solutions create this regulatory tension. Although centralized sequencers often offer better implementation of the retail trade by preventing leading and sandwich attacks, they concentrate the control of transaction regulation in ways that can activate obligations for securities legislation in handling tokenized effects.
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Peirce recognized MEV monitoring, but lets the community prefer to develop solutions before intervening with regulations. She said:
“I don’t want us to necessarily jump in and solve the problems, the MEV, the problems surrounding MEV that the community can solve itself.”
The distinction becomes crucial as the traditional effects migrate to blockchain infrastructure. Peirce wants clear boundaries that protect developers that “write code” of registration requirements, while centralized intermediaries meet existing frameworks.
This approach reflects Peirce’s wider regulatory philosophy of principles -based supervision that retains innovation while retaining investor protection.
She argues for rules that distinguish between code that works autonomously and entities that use code to perform regulated activities.
The framework of the Commissioner suggests that truly decentralized protocols receive a regulating safe haven, while low-2 chains with centralized control mechanisms are confronted with traditional intermediary supervision.
This background creates a spectrum where the legal requirements correlate with centralization levels instead of the technological type.
As the tokenization of traditional effects accelerates, Layer-2 operators must evaluate or activate their centralized components registration obligations of the exchange, in particular when processing securities transactions via controlled matching engines.