Shifting the Regulatory Paradigm: L1 Blockchains as Infrastructure, Not Exchanges

A fresh perspective on DeFi regulation is emerging from Hyperliquid founder Jeff Yan. He advocates for U.S. regulators to classify Layer 1 blockchains as foundational infrastructure rather than direct trading venues. This conceptual shift would relocate the primary burden of compliance away from the protocol layer itself, placing it instead on the institutions that build and operate specific trading markets atop this neutral base layer.

How the New Model Would Work & Its Potential Benefits

Adopting this framework would reshape industry operations. Market operators—such as perpetual futures platforms—would become the entities responsible for regulatory duties like KYC and AML. The underlying L1 blockchain would function like the internet's core protocols, maintaining its neutral, open-access nature.

Under this model, U.S. users seeking exposure to on-chain perpetual contracts might not need to wait for a full exchange registration process. Instead, they could potentially access these markets through already-regulated intermediaries like Bitnomial or Kraken, creating a bridge between compliant gateways and innovative protocols.

  • Lower Barrier to Innovation: New DeFi projects could experiment with products and markets more swiftly within a clearer compliance context.
  • Bridge to Traditional Finance: Traditional institutions could explore on-chain assets and derivatives through familiar, regulated counterparties.
  • Clearer Accountability: Regulatory oversight would have a more precise target, focusing on the entities directly facilitating market activity.

Inevitable Regulatory Hurdles and Points of Contention

While this vision offers a novel path forward, significant obstacles remain. A central point of contention is the offshore legal structure employed by many protocols, including Hyperliquid. Designed to navigate regulatory uncertainty, such structures may be viewed by U.S. Congress and the Commodity Futures Trading Commission (CFTC) as attempts to evade jurisdiction.

Regulators are likely to question the logic of designating a network controlled by an offshore entity as domestic "infrastructure." Concerns about regulatory arbitrage would arise—could core operators remain outside regulatory reach while benefiting from a compliance "safe harbor"? Any discussion of reclassification will inevitably lead to intense scrutiny of a protocol's governance, control points, and applicable legal jurisdiction.

Jeff Yan's proposal touches on a core tension in Web3 governance: how to effectively regulate decentralized, global technology within local legal frameworks. Defining public blockchains as infrastructure represents an attempt to find equilibrium between innovation and legal order. Its trajectory will depend not only on industry consensus but also on the adaptability and foresight of regulators themselves.