Coinbase chief legal officer Paul Grewal and Base founder Jesse Pollak recently made a case for Layer-2 (L2) sequencers being classified as infrastructure rather than exchanges. This argument goes against the current regulatory stance, with SEC Commissioner Hester Peirce previously warning that centralized matching engines could trigger exchange registration requirements.
In a post on Sept. 22, Grewal likened Base’s sequencer to Amazon Web Services, explaining that L2 blockchains function as general-purpose infrastructure that processes code deterministically. He pointed out that L2s batch all transactions and defer order interactions to an app’s smart contracts and frontend.
Pollak supported this infrastructure argument with technical details, stating that Base’s sequencer collects user transactions, orders them in a first-in/first-out manner, and batches them to Ethereum for settlement. He clarified that sequencers dictate transaction processing order but do not act as matching engines that facilitate buy and sell order pairings.
According to Pollak, transaction matching and execution occur at the application level within smart contracts, with the sequencer ensuring consistent and ordered transaction execution without influencing trade logic. Users also have the option to bypass the sequencer by transacting directly on Base through Ethereum, maintaining decentralization and censorship resistance from Ethereum’s validator set.
From the SEC’s regulatory perspective, Peirce emphasized the distinction between truly decentralized protocols and centralized entities leveraging blockchain technology. She cautioned that layer-2 solutions with centralized transaction ordering could face regulatory scrutiny, particularly if they resemble exchanges due to a controlling entity overseeing all components.
Peirce highlighted the importance of protecting genuinely decentralized protocols, which she described as code that nobody owns and cannot register with regulators. Pollak acknowledged Base’s current centralization but noted progress towards “stage 1 decentralization” and plans for further decentralizing block building in the future.
The discussions between Grewal, Pollak, and Peirce underscored the need for a comprehensive crypto regulatory framework to address issues like the evolving decentralization status of platforms such as Base. As the industry continues to innovate, balancing regulatory compliance with technological advancements remains a crucial consideration for all stakeholders.
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This article has been crafted for a WordPress platform and offers a fresh perspective on the evolving regulatory landscape for blockchain infrastructure and exchanges.