Coinbase, SEC Clash Over Layer-2 Sequencer Regulation

Coinbase’s leadership has mounted a detailed technical and legal defense positioning Layer-2 sequencers as neutral infrastructure. In a September 22 post, Chief Legal Officer Paul Grewal drew a direct comparison between Base’s sequencer and Amazon Web Services, arguing that L2 blockchains operate as “general-purpose infrastructure processing code deterministically.” The core of Grewal’s argument is that sequencers “batch all transactions while deferring any formal order interaction/matching rules to an app’s smart contracts and frontend.” This framing suggests sequencers are passive conduits, not active market facilitators.

Base founder Jesse Pollak provided the technical underpinnings for this infrastructure classification. He explained that the Base sequencer performs three primary functions: collecting user transactions, ordering them on a first-in/first-out basis, and batching them for settlement on the Ethereum mainnet. Crucially, Pollak emphasized that while the sequencer determines the *order* of transaction processing, it does not function as a matching engine that pairs buy and sell orders. “Transaction matching or execution happens at the application level, within smart contracts,” Pollak stated. “The sequencer ensures these transactions are executed in a consistent, ordered manner, but it doesn’t decide matches or control trade logic.”

This distinction is vital for the regulatory argument. By separating transaction ordering from trade execution, Coinbase contends that the sequencer is merely a scalability tool that enhances Ethereum’s throughput without taking on the regulatory characteristics of an exchange. Pollak further bolstered the decentralization argument by noting that users can bypass Base’s sequencer entirely by transacting on the L2 network directly through Ethereum, thereby preserving the censorship resistance inherited from Ethereum’s validator set.

The SEC’s perspective, articulated by Commissioner Hester Peirce during a September 8 interview, presents a starkly different regulatory lens. Peirce drew a clear distinction between “truly decentralized protocols” and centralized entities using blockchain technology. For Layer-2 solutions with centralized transaction ordering, her warning was unambiguous: “If you have a matching engine that’s controlled by one entity that controls all the pieces of that, then that looks a lot more like an exchange.”

Peirce’s comments suggest the SEC is focusing on functional control rather than technical architecture. Even if matching technically occurs in smart contracts, the entity controlling the sequencer—which determines transaction order and availability—could be seen as facilitating the trading process. This is particularly significant when securities transactions might be involved. Peirce added that operators “must consider exchange registration if they facilitate securities transactions through centralized systems,” a statement that casts a long shadow over L2 networks where various tokens, potentially including securities, are traded.

Commissioner Peirce also highlighted the regulatory challenge of protecting genuinely decentralized systems, which she described as code that “nobody owns” and therefore cannot register with regulators. This creates a spectrum where fully decentralized protocols might avoid registration, while systems with centralized components like Base’s current sequencer operation could face significant regulatory obligations. The SEC’s approach appears to be a facts-and-circumstances test rather than a bright-line rule, contributing to the current regulatory uncertainty.

Caught between these competing visions, Base acknowledges its current transitional state. Pollak described the platform as having reached “stage 1 decentralization” with enabled permissionless block proposals, while the team continues working toward “stage 2” decentralization and further decentralizing block building. This staged approach reflects the practical challenges of launching and scaling L2 networks while gradually reducing centralized control points.

The fundamental disconnect highlighted by this debate underscores the absence of a tailored regulatory framework for crypto. The existing securities laws were designed for traditional financial intermediaries, creating a poor fit for hybrid technologies like Layer-2 solutions that blend centralized and decentralized elements. The outcome of this classification debate will have profound implications not just for Base but for the entire ecosystem of L2 scaling solutions being built on Ethereum and other blockchains.

Ultimately, the resolution may depend on whether regulators accept the technical distinction between infrastructure and exchange functionality, or whether they view any centralized component in a trading pathway as triggering exchange obligations. Until clearer guidelines emerge, Layer-2 projects operate in a gray area where technological innovation outpaces regulatory categorization, creating both opportunity and significant compliance risk for the industry’s most promising scaling solutions.