Why Centralized Relay Hub Are a Regulatory Target

Centralized relayers and multisigs are legally identifiable entities that can be forced to censor transactions. This turns bridges like Wormhole and Multichain into single points of regulatory failure, undermining crypto's core value proposition.

• Legal Pressure: Relayer operators can receive sanctions lists and be compelled to filter.
• Protocol Risk: A sanctioned address could be frozen, stranding $100M+ in liquidity.
• Precedent: The Tornado Cash sanctions demonstrate regulators will target infrastructure.

Shifting from trusted relays to decentralized proof verification (e.g., zkBridge, Succinct) moves the attack surface from a legal entity to a cryptographic protocol. Validators are anonymous and geographically distributed.

• No Legal Entity: A zk-SNARK verifier contract has no CEO to subpoena.
• Censorship-Resistant: Transactions are validated by a permissionless set of provers, not a relayer.
• Ecosystem Shift: Polygon's Avail and EigenLayer restakings are building these networks.

Bridges that custody user funds during the transfer are being classified as Money Service Businesses (MSBs) by the FINCEN and SEC. This applies to most lock-and-mint bridges, requiring burdensome licenses in every jurisdiction.

• Licensing Hell: Operating in 50 states requires 50+ MSB licenses.
• Capital Requirements: MSB classification brings heavy compliance and reporting overhead.
• Existential Threat: The LayerZero and Wormhole token airdrops attracted immediate SEC scrutiny.

Intent-based architectures like UniswapX and CowSwap's CoW Protocol facilitate cross-chain swaps without ever taking custody. Solvers compete to fulfill user intents atomically using Across-style optimistic verification or LayerZero's DVNs.

• No Custody: User funds never leave their wallet in a vulnerable escrow.
• Regulatory Arbitrage: The protocol is a set of smart contracts, not a financial intermediary.
• Market Traction: UniswapX already processes $1B+ volume via this model.

Many "decentralized" bridges rely on a centralized sequencer to order messages or a single oracle for price feeds. This creates a soft target for regulators to disrupt the entire system's liveness.

• Operation Chokepoint 2.0: A single AWS region hosting the sequencer can be shut down.
• Oracle Manipulation: A compromised or coerced price feed can drain liquidity pools.
• Real Example: The Axie Infinity Ronin Bridge hack exploited 5/9 multisig control.

Networks like Connext with Amarok and Circle's CCTP leverage the underlying security of the chains they connect. Settlement occurs on-chain, secured by Ethereum or Solana validators, not a new federated set.

• L1 Security Inheritance: The bridge's safety is a function of the connected chain's $30B+ stake.
• Slashing Mechanisms: Malicious relayers can have their bonded stake slashed.
• Institutional Adoption: CCTP is used by Coinbase and Metamask for its clear regulatory posture.

The US Treasury sanctioned the Tornado Cash smart contracts and its centralized front-end relayers, which were required for users to submit private transactions. This established a precedent: infrastructure that facilitates transactions for sanctioned entities is itself a target, regardless of its decentralized backend.

• Key Precedent: Infrastructure as a sanctions target.
• Impact: Relay services were forced to censor or shut down, breaking the user experience.

ConsenSys (MetaMask's parent company) updated its privacy policy, revealing that Infura, its centralized RPC and transaction relay service, collects users' IP and wallet addresses. This highlights the regulatory risk of KYC/AML obligations being forced upon centralized service providers that sit between users and the chain.

• Key Risk: Forced data collection and user identification.
• Exposure: ~30M monthly users funneled through a centralized data choke point.

After the Merge, ~47% of Ethereum blocks were OFAC-compliant, built by relayers like Flashbots that censored transactions from Tornado Cash. This demonstrated how centralized relayers in the MEV supply chain (builders, searchers) can become de facto enforcement arms, creating regulatory capture at the protocol level.

• Key Mechanism: Censorship via centralized block building.
• Result: Protocol-level compliance without a protocol-level rule change.

Major token bridges like LayerZero and Wormhole rely on centralized off-chain relayers or guardians to attest to cross-chain state. Regulators view these entities as clear, liable intermediaries for the $10B+ in assets they secure. A sanction or legal action against a relayer could freeze billions in interoperability.

• Key Vulnerability: Single entity controls message attestation.
• Scale: $10B+ TVL dependent on centralized oracle sets.

A relay that sequences or finalizes transactions for a $1B+ rollup is a clear Money Services Business (MSB). Regulators will treat its transaction ordering as a sanctionable service, forcing censorship.\n- Legal Precedent: Tornado Cash sanctions targeted relayers and RPC endpoints.\n- Builder Risk: Your chain's liveness depends on a legally vulnerable entity.\n- Investor Diligence: Scrutinize relay legal structure and jurisdiction.

Relays aggregate petabytes of user transaction data, creating a massive data lake subject to EU's GDPR and similar regimes. A centralized entity holding this data is liable for breaches and compliance.\n- Liability Shift: Builders outsource data handling but not legal responsibility.\n- Architecture Mandate: Solutions like Celestia's data availability or EigenDA push liability to a decentralized network.\n- VC Red Flag: A startup acting as a global data processor is a regulatory time bomb.

If a few relay providers (e.g., BloXroute, Blockdaemon) dominate sequencing for major L2s, they effectively control >60% of Ethereum's block space. This creates a cartel that can be targeted for anti-competitive practice investigations.\n- Market Power: Centralized relays can extract MEV and set fees opaque to end-users.\n- Builder Lock-in: Reliance on a dominant relay creates switching costs and stifles innovation.\n- Investment Thesis: Back protocols with credibly neutral, decentralized sequencing (e.g., Espresso, Astria).

The only durable fix is to eliminate the centralized relay hub entirely. This isn't a feature—it's a requirement for regulatory survivability.\n- Technical Paths: Shared sequencer sets (EigenLayer), PoS validator sequencing, or permissionless mempools.\n- Immediate Action: Builders must design for relay replaceability from day one.\n- Due Diligence: Investors should discount valuations of projects with centralized sequencing roadmaps.