Developer Ignites Firestorm, Claims Ethereum Layer-2s Operate As Unregistered MSBs

Ethereum is a legacy chain that has scaled over time to handle the wants of the ever-demanding world person base. To alleviate the mainnet of the deluge of transactions, extra layer-2 platforms have sprouted.

They’re cheaper to transact on and scalable, permitting customers to deploy intensive decentralized purposes that received’t be possible on the bottom layer.

Ethereum Layer-2s Are A Success, However There Is A Drawback

In line with L2Beat, layer-2 platforms on Ethereum presently handle over $39 billion in complete worth locked (TVL). Even so, Nikita Zhavoronkov, a lead developer at Blockchair, is worried and thinks layer-2s are a “big authorized legal responsibility ready to occur.”

Taking to X, Zhavoronkov argues that layer-2 protocols on Ethereum and Bitcoin are weak to regulator crackdown. Within the developer’s evaluation, these platforms resemble cash service companies (MSBs), contemplating how they’re designed to function. Since they aren’t regulated, the developer mentioned they could be working illegally.

Prime of the record, Zhavoronkov argues that almost all present layer-2 options usually are not really decentralized. They level to utilizing multi-signature contracts or “emergency councils” managed by restricted teams as proof of centralized management. 

Furthermore, the developer highlighted the custodial nature of many layer-2s. Customers don’t immediately management person funds primarily based on how these scalable platforms function. The analyst says this tinge of centralization presents a vulnerability if regulators goal these entities.

Zhavoronkov provides that although layer-2 platforms are enablers, working from a trustless base, they perform as for-profit companies, producing income from transaction charges. As a result of a few of them, like Optimism and Arbitrum, challenge tokens, income accrued can impression token costs.

The developer contends that because of this layer-2 platforms are not any totally different from conventional firms than really decentralized platforms.

Extra Headwinds For ETH, United States SEC Reported Investigation

Given their mode of operation and mannequin, Zhavoronkov’s assertion that layer-2 options might be categorized as MSBs underneath United States legal guidelines is a priority. Such a classification may topic these protocols to stringent rules, compliance necessities, and potential sanctions. 

This not solely threatens to stifle innovation but additionally has the potential to hamper Ethereum’s scalability severely.

Whereas some have dismissed Zhavoronkov’s viewpoint as “distorted,” the truth that Ethereum is reportedly underneath investigation by the USA Securities and Trade Fee (SEC) provides a layer of complexity to the scenario. 

Analysts say the SEC’s classification of ETH as a safety relatively than a commodity like BTC may additional delay the approval of spot Ethereum exchange-traded funds (ETFs).

Function picture from Canva, chart from TradingView