SEC Commissioner Hester Peirce warned that the in-depth matching engine of the Layer-2 blockchain could face exchange registration requirements while advocating for regulatory protection for truly distributed protocols.
In an interview with Guwartshaw, Perth pointed to her vision of cryptographic regulation, drawing a sharp distinction between immutable code that operates in decentralized networks and centralized entities that use blockchain technology to drive transactions.
Distributed protocols cannot be owned
The head of the SEC’s Crypto Task Force considers the protocol as a set of rules that cannot be owned, saying that “no one owns it.”
Layer-2 solutions introduce regulatory complexity as they centralize transaction orders to address the issue of maximum extractable values (MEV).
These chains run matching engines that control transaction sequences starting from distributed node architectures that define traditional blockchain censorship resistance.
Pierce said:
“If there is a matching engine controlled by one entity that controls all of its parts, it looks like a replacement.”
She added that operators of such systems should consider that if they are trading, they will match securities transactions. However, the SEC wants to avoid enforcing truly distributed protocols to register as exchanges or broker dealers.
Peirce points out the importance of protecting immutable smart contracts deployed on well-distributed Layer-1 networks, explaining that “only the code is there” that “can’t register with us.”
Studying MEV
MEV solutions create this regulatory tension. Centralized sequencers often provide better retail execution by preventing frontrunning and sandwich attacks, but control transaction orders in ways that can cause securities law obligations when processing tokenized securities.
Peirce has approved MEV monitoring, but prefers to have the community develop solutions before intervening in regulations. She said:
“We don’t want the community to jump in and solve the issues surrounding MEVs, MEVs, issues that the community itself can solve.”
This distinction becomes important as traditional securities move towards blockchain infrastructure. Peirce wants clear boundaries to protect developers who “write code” from registration requirements, but ensure that centralized intermediaries are compliant with existing frameworks.
This approach reflects Perth’s broader regulatory philosophy on surveillance based on principles that maintain innovation while maintaining investor protection.
She advocates rules that distinguish between code that operates autonomously and entities that use code to perform regulated activities.
The commissioner framework suggests that while truly decentralized protocols receive regulatory safe harbors, layer 2 chains with centralized control mechanisms face traditional intermediaries monitoring.
This background creates a spectrum in which regulatory requirements correlate with concentration levels rather than technology type.
As traditional securities tokenization accelerates, the Layer-2 operator must assess whether centralized components cause exchange registration obligations, particularly when processing securities transactions via controlled matching engines.
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