Will Crypto Become a Centralized “Hellscape”?

Sarah Brennan is a US corporate and securities attorney who serves as General Counsel at Delphi Ventures, a venture capital firm focused on Web3 investments. She spent 14 years focused on corporate securities law and became active in the digital asset space in 2017.

Brennan is also a co-founder of the LeXpunK project, focusing on legal defense for decentralized communities.

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

Large 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 formed a crypto super PAC as a response to heavy-handed regulation by the SEC and the Biden administration, such as the controversial SAB 121 crypto bill that Biden recently supported.

“Personally, I think SAB 121 reflects the Biden administrator’s various attempts to isolate us from the broader financial system,” Brennan told crypto.news. “Ultimately, it appears that while the Biden campaign wants our votes, they don’t want to be accountable to us in terms of policy.”

However, while Brennan supports “younger, digitally native candidates” in politics, she expresses concerns about the nature of lobbying efforts by key players.

“I worry about having political momentum and where that will lead us – crypto is not monolithic and decentralized communities are less able to protect themselves politically.“

“We need more creative attempts at regulation that reflect the paradigm shifts in cryptography,” she says. “I think large centralized institutions, as the predominant ‘voice’ in crypto, are a double-edged sword,” adding that centralized institutions pose the risk of “recreating the commercial market structure.”

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

“Our current regulatory system is based on these types of intermediaries, all layered on top of each other, all licensed gatekeepers, all looking for rent. It sucks, right?

“Monopolists Like We’ve Never Seen”: Centralized Crypto Explained

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

“Without any legislative or regulatory counterweights, we could fall victim to a true hellscape in practice, where large centralized players are positioned to become monopolists like we have never seen,” says Brennan.

“They can vertically integrate and own everything from the infrastructure – L1s, nodes, wallet applications/custodial solutions, miners, validators, governance token supply monopolies – while also having monopolies in more traditional businesses, such as trading platforms, creating market arms, managing proprietary VC companies and development shops.

“A crypto-centric future is just duplicating all the evils of the existing system without adding any social value.”

Brennan adds that even without centralized regulation, crypto “could be destroyed by concentration of ownership” by large institutions that now dominate the industry.

“I think people who are new entrants forget that crypto (Bitcoin) was born out of the 08/09 financial crisis. It was a response, 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

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

“In crypto, it makes a lot of sense to regulate large centralized actors, especially those that have inherent conflicts of interest in their many businesses that can pose systemic risks,” says Brennan.

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

A big problem, of course, has been the lack of regulatory clarity to date, which can actually encourage bad business practices, according to Brennan, due in large part to SEC Chairman Gary Gensler.

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

“Gensler was driven purely by politics and therefore utterly failed to achieve good political results to the detriment of everyone.”

“The harm it created was largely due to the lack of a policy framework that would provide a path to compliance.”

Radical Defense: How Crypto Lawyers Are Fighting Back

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

In 2022, Brennan and a group of co-authors wrote a SEC Structure with the aim of allowing token projects to legally issue cryptographic tokens.

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

The proposal was discussed at a Congressional committee on Fintech in 2023. While crypto-native legal professionals drafting improved proposals for regulators to consider seems like an ideal solution to today’s problems, the proposal appears to have fallen on deaf ears for now.

“We seem incredibly unwilling, as a nation, to examine where political solutions have failed; We do not have the ability to pivot or recover, preferring to double down.”

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

Brennan believes that by preventing the formation of monopolies, supporting decentralization, and targeting criminals rather than the technologies they use, regulators could undo the damage done in recent years and help promote a safe and secure digital asset economy. prosperous.

The difficulty, of course, is getting regulators to listen to the experts on the other side of the fence.

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

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