Introduction: Infrastructure or Intermediary?
As decentralized exchanges (DEXs) play a larger role in the cryptocurrency ecosystem, the question of how these protocols should be regulated is becoming more pressing. Hyperliquid founder Jeff Yan has recently argued that DEX protocols should be classified as neutral infrastructure, comparable to the foundational layers of the internet, rather than as financial intermediaries. This view differs from the approach of many US regulators, who have increased their scrutiny of DeFi platforms. The outcome of this regulatory debate could significantly affect compliance requirements and the future direction of decentralized finance.
Hyperliquid’s Regulatory Proposal in Context
Yan’s argument is based on the idea that DEX protocols serve as technological platforms and do not directly facilitate financial transactions themselves. He likens DEX protocols to internet standards such as TCP/IP or HTTP, which support communication and commerce but do not act as financial agents. According to Yan, regulatory attention should be directed at companies and organizations that build financial products or operate markets using these protocols, rather than at the protocols themselves. He believes this would make it easier for traditional financial institutions to adopt DeFi technology, as the underlying protocols would not face the same regulatory obligations as exchanges or brokers.
If this approach were implemented, DEX protocols would be regarded as open infrastructure, with regulatory responsibilities shifted to those who create and manage specific markets or applications. This distinction is intended to clarify the line between neutral code and active financial intermediation, potentially reducing compliance burdens for protocol developers.
Legal Precedents and Regulatory Landscape
The idea of treating technology as neutral infrastructure is not new in other areas of law. For instance, internet service providers and network operators have benefited from safe harbor provisions that limit their liability for user actions as long as they do not actively participate in or facilitate illegal activity. In contrast, the financial sector has typically imposed stricter requirements, often holding intermediaries responsible for enabling illicit transactions or noncompliant markets.
In the DeFi context, US regulators have shown skepticism toward the neutrality argument. There is ongoing debate about whether DEX developers and protocol maintainers should be responsible for activities that occur on their platforms. The absence of clear legal precedent leaves the sector exposed to changing interpretations and evolving enforcement, creating uncertainty for both protocol teams and users.
Risks and Uncertainties for DeFi
If DEX protocols are classified as infrastructure, developers could face lower compliance costs and reduced legal risks, which might encourage more rapid innovation. However, this approach also presents challenges. There is a possibility that some actors could exploit the infrastructure designation to avoid oversight, potentially enabling illicit finance, market manipulation, or weakening consumer protections. In response, regulators may impose stricter requirements on those who interact with or build on these protocols, increasing compliance demands for market operators, aggregators, and liquidity providers.
For users and investors, the current lack of regulatory clarity creates uncertainty about the safety and legitimacy of participating in protocol-based markets. Without well-defined rules, the sector risks inconsistent enforcement or abrupt regulatory changes, which could slow mainstream adoption and deter institutional involvement.
Implications for Innovation and Compliance
If regulators accept the argument for treating DEX protocols as infrastructure, it could encourage traditional financial institutions to explore DeFi technologies, knowing that the underlying protocols would not be regulated as full exchanges. This could result in new products and greater liquidity, while shifting compliance obligations to those operating at the application or market level.
On the other hand, if regulators reject this distinction, protocol teams may face direct liability, leading to more cautious development, higher legal expenses, or restricted access for certain users. The long-term effects will depend on whether lawmakers and regulators are willing to distinguish between neutral technological infrastructure and financial intermediation, or if they continue to hold protocol creators responsible for downstream activity.
Conclusion: The Path Forward
Hyperliquid’s proposal raises important questions about how DEX protocols should be regulated and the responsibilities of those who develop and maintain them. As this debate unfolds, the DeFi community must consider the implications for innovation, market access, and regulatory risk. The way these issues are resolved will influence the next stage of DeFi development and its relationship with traditional finance.
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