Will Cryptocurrencies Become a Centralized “Hellscape”?

Sarah Brennan is a US corporate and securities lawyer and serves as General Counsel for Delphi Ventures, a VC firm focused on Web3 investments. You have dedicated 14 years to corporate securities law and became active in the digital assets sector in 2017.

Brennan is also a co-founder of the LeXpunK project with its focus on legal defense of decentralized communities.

Speaking exclusively with crypto.news, the cryptocurrency law advocate shared her thoughts on crypto super PACs, lack of regulation, and the danger of recreating the traditional financial system with cryptocurrencies again.

Major institutions are a “double-edged sword”

Over the past year, crypto companies like Ripple and Circle have raised over $100 million to finance congressional campaigns. In doing so, they formed a Crypto super PAC as a response to harsh regulation from the SEC and the Biden administration, such as the controversial SAB 121 cryptocurrency bill that Biden recently supported.

“I personally think that SAB 121 reflects the Biden administration’s various attempts to cut us off from the broader financial system,” Brennan tells crypto.news. “Ultimately, it appears that while the Biden campaign wants our votes, he does not want to be accountable to us on policy.”

However, while Brennan supports “younger, digitally native candidates” in politics, he expresses concern about the nature of lobbying efforts by major players.

“I worry about political momentum and where this will take us: cryptocurrencies are not monolithic and decentralized communities are less able to protect themselves politically.“

“We need more creative attempts at regulation that reflect paradigm shifts in the cryptocurrency industry,” he says. “I think large centralized institutions as the predominant ‘voice’ in the cryptocurrency world is a double-edged sword,” adding that centralized institutions carry the risk of “re-creating the traditional market structure.”

Brennan describes this centralization of political power as “antithetical to the ethics of space.”

“Our current regulatory system is based on these types of intermediaries layered on top of each other, all licensed gatekeepers, all rent-seeking. It’s a great drug, right?”

“Monopolists like we’ve never seen”: centralized crypto explained

Brennan explains what consolidating power in the hands of a few major crypto operators would actually look like.

“Without any legislative or regulatory counterbalancing, we can become a virtual hellscape in practice where large, centralized players are positioned to become monopolists like we have never seen,” Brennan says.

“They can vertically integrate and own everything from infrastructure – L1s, nodes, wallet apps/custody solutions, miners, validators, governance token supply monopolies – while having monopolies on more traditional businesses like trading platforms, weapons market making, management of VCs owning companies and development centers.”

“A centralized future in the cryptocurrency industry only doubles all the evils of the existing system without adding any social value.”

Brennan goes on to add that even without centralized regulation, cryptocurrencies “could be destroyed by concentrated ownership” by the major institutions that now dominate the industry.

“I think new entrants forget that cryptocurrency (Bitcoin) was born out of the 8/09 financial crisis. It was an answer, a reaction to the “too big to fail” monopolists and the evils of the traditional financial system.”

A failed legacy: Where SEC regulation didn’t work

According to Brennan, large institutions in the cryptocurrency sector can and should be regulated, but the challenges this brings are similar to those in the world of traditional finance.

“In the cryptocurrency industry, it makes a lot of sense to regulate large, centralized players, particularly those that have inherent conflicts of interest in their many activities that could pose systemic risks,” Brennan says.

“If you are truly a DINO (Decentralized In Name Only) and not decentralized, you should, by law, be treated like any traditional actor.”

A big problem, of course, to date has been the lack of clarity in regulation, which Brennan believes can actually incentivize bad business practices, largely due to SEC Chairman Gary Gensler.

“Gensler’s legacy, if you can call it that, has been to prosecute good actors and discourage good practices in the industry,” Brennan says, adding that “compliance is often at odds with the business case.”

“Gensler was driven solely by politics and therefore completely failed to produce good political results to the detriment of everyone.”

“The damage it created was largely due to the lack of a policy framework that provided a path for compliance.”

Radical Defense: How Crypto Lawyers Are Reacting

Brennan is a co-founder of LeXpunK, a cryptocurrency law advocacy and funding group that brings together lawyers, cryptocurrency industry professionals, developers and investors. One of the group’s aims is to create potential new legal frameworks and proposals for consideration by regulators.

In 2022, Brennan and a group of co-authors drafted a SEC framework aimed at enabling token projects to legally issue crypto tokens.

The framework would potentially support token creation without running afoul of securities law or endangering end users, even for token projects that do not qualify for the “safe harbor” outlined in existing SEC guidance.

The proposal was discussed in a congressional committee on Fintech in 2023. Although native cryptocurrency legal professionals have improved proposals for regulators to consider seems like an ideal solution to today’s problems, the proposal seems to have fallen on deaf ears for now .

“We seem incredibly reluctant as a nation to examine where political solutions have failed; we lack the ability to rotate or recover, preferring instead to double down.

According to this legal expert, cryptocurrency regulation should focus primarily on preventative antitrust enforcement to prevent institutions from becoming “too big to fail.”

Brennan believes that by preventing monopolies from forming, supporting decentralization, and targeting criminals rather than the technologies they use, regulators could undo the damage done in recent years and help foster a safe and thriving digital asset economy.

The difficulty, of course, is convincing regulators to listen to the experts on the other side of the fence in the first place.

At the time of writing. Brennan is working on a new advocacy initiative to continue supporting decentralized communities.

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