Will crypto become a centralized “hellscape?

Sarah Brennan is a US corporate and securities lawyer who serves as General Counsel for Delphi Ventures, a VC firm focused on Web3 investment. She spent 14 years focusing on corporate securities law and became active in the digital assets space in 2017.

Brennan is also the co-founder of the LeXpunK project, which focuses on legal advocacy for decentralized communities.

Speaking exclusively with Crypto.news, the crypto law advocate shared his thoughts on crypto super PACs, failed regulations, and the danger of remaking the traditional financial system with crypto.

Major institutions are a “double-edged sword”

Crypto companies like Ripple and Circle raised more than $100 million to fund congressional campaigns last year. In doing so, they created a crypto super PAC in response to harsh regulations from the SEC and the Biden administration, such as the controversial SAB 121 crypto bill that Biden recently passed.

“I personally think SAB 121 reflects various attempts by the Biden admin to separate us from the broader financial system,” Brennan told crypto.news. “Ultimately, it seems that while the Biden campaign wants our votes, it does not want to be accountable to us on policy.”

19:00 on a Friday is a cowardly act. There is NO bona fide reason for SAB 121 to exist. If someone shows you who they are (for the 1000th time), believe them. https://t.co/xE2UfTW1mk

— S. Brennan (@SH_Brennan) May 31, 2024

But while Brennan supports “younger, digitally native candidates” in politics, he expresses concerns about the nature of lobbying efforts by big players.

“I worry about the political momentum building and where it will take us; cryptocurrency is not a monolith and decentralized communities are least able to protect themselves politically.”

“We need more creative initiatives on regulation that reflect paradigm shifts in crypto,” he says. “I think large centralized institutions being the dominant ‘voice’ in crypto is a double-edged sword.” He added that central institutions pose a risk of “recreating the trading market structure”.

Brennan describes this centralization of political power as “contrary to the ethos of the place.”

“Our current regulatory system is based on an overlay of such middlemen, all licensed gatekeepers and all rent-seeking. It’s a great medicine, isn’t it?”

“Monopolists we’ve never seen”: centralized crypto statement

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

“Without any legal or regulatory balance, we could in practice become a literal hellscape where large centralized actors are positioned to be monopolistic in ways we have never seen before,” says Brennan.

“They can vertically integrate and own everything from infrastructure (L1s, nodes, wallet applications/custody solutions, miners, validators, governance token supply monopolies); They may also have monopolies in more traditional businesses, such as trading platforms, market-making arms, running private VCs, and so on. companies and development shops.”

“A centralized future in crypto means doubling down on all the problems of the current system without adding any social value.”

Brennan adds that even without centralizing regulation, cryptocurrency could be “destroyed by concentration of ownership” by the large institutions that currently dominate the industry.

“I think people new to the market forget that crypto (Bitcoin) was born out of the financial crisis of 08/09. “This was a reaction, a backlash against the ‘too big to fail’ monopolists and the ills of the traditional financial system.”

A failed legacy: Where SEC regulation doesn’t work

Large institutions in the crypto space can and should be regulated, according to Brennan, but the challenges that arise are similar to those in the traditional financial world.

“In crypto, it makes perfect sense to regulate large centralized players, especially those with inherent conflicts of interest that could pose systemic risks to many of their businesses,” says Brennan.

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

A big problem, of course, has been the lack of clarity to date in legislation that can encourage bad business practices, according to Brennan, with input from SEC Chairman Gary Gensler.

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

“Gensler has been completely driven by politics and has therefore completely failed to deliver good policy outcomes, to the detriment of everyone.”

“The damage it caused was largely due to the lack of a policy framework that provided a pathway for adaptation.”

Radical advocacy: How crypto lawyers are fighting back

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

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

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

The proposal was discussed in a congressional committee on Fintech in 2023. While crypto-specific legal experts are drafting proposals for regulators to consider cryptocurrencies as an ideal solution to today’s problems, the proposal appears to have fallen on deaf ears for now.

“As a nation we seem incredibly reluctant to examine where policy solutions have failed; “We lack the ability to pivot or recover, opting instead to double down.”

According to this legal expert, crypto regulation should focus on preemptive antitrust enforcement to prevent institutions from becoming “too big to fail” in the first place.

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

The challenge, of course, is to get regulators to listen to 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 his support of decentralized communities.