"Mother of Crypto Assets" warns: Centralized sorter L2 chain may be seen as exchange sign up requirement.

Hester Peirce, a commissioner of the U.S. Securities and Exchange Commission (SEC), known as the "mother of cryptocurrencies," recently warned that if a second layer (L2) Blockchain operates with a centralized sequencer controlled by a single entity, it could trigger exchange sign up obligations. She also emphasized that truly Decentralized and immutable protocols should receive regulatory protection to avoid being forced into the Compliance framework of TradFi.

Centralized Sorter Raises Regulatory Concerns

During an interview with The Gwart Show, Peirce clearly distinguished between two types of Blockchain operating models:

Decentralized protocol: Immutable smart contracts deployed on a Layer 1 (L1) network, owned by no one and available to anyone, should enjoy regulatory safe harbor.

Centralized Sorter L2: A matching engine operated by a single entity is responsible for transaction sorting, similar to the matching mechanism of traditional exchanges, and may be regarded as a Financial Intermediary in securities trading.

She pointed out that if the L2 operator controls all transaction ordering and processes tokenized securities, it may need to comply with the registration regulations of exchanges or brokerage firms.

The MEV issue exacerbates regulatory complexity

Peirce specifically mentioned that many L2s adopt centralized orderers to address the Maximum Extractable Value (MEV) issue, such as preventing front-running and sandwich attacks.

Pros and Cons: While centralized order books can improve the quality of retail trade execution, they also centralize trading control, increasing regulatory risks.

Regulatory stance: Peirce expressed that she does not wish for the SEC to intervene immediately in MEV solutions, but rather prefers to let the community explore first and then formulate rules as necessary.

Impact on Developers and Practitioners

Peirce's regulatory framework aims to draw a line:

Developer Protection: Developers who only write and deploy self-running code should not be forced to sign up because the protocol is used for trading.

Operator Responsibility: If the operator uses code to facilitate securities transactions in a centralized environment, they must comply with existing intermediary regulatory standards.

This means that as traditional securities accelerate tokenization, L2 operators must examine their own architecture to ensure that centralized components do not trigger exchange registration obligations.

Balancing Regulation and Innovation

Peirce's position continues her consistent "principle-based regulation" philosophy:

Protecting Innovation: Maintain an open attitude towards Decentralization protocols and avoid excessive regulation that stifles technological development.

Protecting investors: Imposing necessary regulations on intermediaries with centralized control to ensure market fairness and transparency.

As the position of L2 solutions in the Blockchain ecosystem increases, this regulatory demarcation will directly impact the design of future infrastructure and Compliance strategies.

Conclusion

The warning from SEC Commissioner Peirce highlights the potential regulatory risks of L2 centralized sequencers and provides a clear signal to the industry: truly decentralized protocols may receive regulatory safe harbor, while L2 chains with centralized control will face compliance requirements of traditional intermediaries. As the integration of tokenized securities and blockchain infrastructure accelerates, finding a balance between innovation and regulation will become a key issue in the future digital asset market.