SEC Commissioner Warns of Regulatory Challenges for Centralized Layer 2 Blockchains

According to PANews, U.S. Securities and Exchange Commission (SEC) Commissioner Hester Peirce has raised concerns about the potential regulatory requirements for Layer 2 blockchains operating centralized matching engines. In an interview on 'The Gwart Show,' Peirce emphasized the importance of protecting genuinely decentralized protocols while distinguishing between immutable code on decentralized networks and centralized entities utilizing blockchain for transactions. The head of the SEC's cryptocurrency task force stated that truly decentralized protocols cannot be owned and are accessible to everyone. Layer 2 solutions, which address the issue of Maximum Extractable Value (MEV) through centralized transaction ordering, introduce regulatory complexities. Peirce noted that matching engines controlled by a single entity resemble exchanges, and operators dealing in securities must consider relevant requirements. However, the SEC aims to avoid forcing decentralized protocols to register. Peirce stressed the importance of safeguarding smart contracts on fully decentralized Layer 1 networks. She advocates for allowing the community to address MEV issues before regulatory intervention. As traditional securities transition to blockchain, Peirce seeks to protect developers and ensure centralized intermediaries comply with regulations. She supports distinguishing between autonomous code and regulated entities, advocating for safe harbor for decentralized protocols while subjecting centralized Layer 2 chains to traditional oversight.