By Alex Urbellis Source: unchainedcrypto Translator: Shan Ouba, Jinse Finance
Alexander Urbelis is an internationally renowned technology lawyer and cybersecurity expert, Professor of Law at King's College London, and General Counsel and Chief Information Security Officer at Ethereum Name Service (ENS). Bridging the gap between legal and technical expertise, Alex is the architect of an award-winning cyber threat intelligence platform designed to identify signs of impending cyberattacks, impersonation, and other malicious activity.
In this article, he explores why Washington’s progress in the cryptocurrency space has failed to advance the cause of decentralization, warning that if this practice isn’t corrected, it may be too late.
The US is becoming the crypto capital of CeFi. Here’s why changes must happen
Bo Hines didn’t make much progress in the decentralized crypto space during his time in the White House. How can his successor, Patrick Witt, become a champion of DeFi?
When Beau Hines stepped down as executive director of the President's Digital Asset Advisory Council, he boasted that he, along with White House AI and crypto czar David Sacks, had "positioned America as the crypto capital of the world." However, his eight-month tenure (which culminated in a highly paid position at a highly centralized crypto firm) primarily resulted in significant victories for the centralized crypto (CeFi) sector. The most significant achievement was the July passage of the GENIUS Act , which paved the way for centralized stablecoin companies like Circle.
This legislation is being mistakenly equated with support for decentralized finance (DeFi), but the opposite is true. Decentralization is being sidelined.
With Patrick Witt, Hines’ deputy, taking over, Witt should demonstrate a deep understanding of the power of decentralization. Otherwise, the U.S. risks being trapped in the structure of centralized finance (CeFi).
The promise and power of cryptocurrencies cannot be separated from their principle of decentralization.
How the US supports CeFi at the expense of DeFi
The GENIUS Act only permits “licensed payment stablecoin issuers” to operate in the United States, significantly favoring centralized companies like Circle. Broadly speaking, a “licensed entity” means one that has received federal approval from the Office of the Comptroller of the Currency (a federal banking regulator) or equivalent state regulators, has established anti-money laundering (AML) and Bank Secrecy Act (BSA) compliance programs, and undergoes regular audits. While decentralized companies could technically form a U.S. legal entity, obtain licenses, and meet all requirements, this would effectively make them centralized.
These restrictions give companies like Circle , which has issued $73.55 billion in USDC, a clear advantage. Indeed, it now appears that global leader Tether (with $171 billion in USDT ) must catch up in the United States. The company recently hired the aforementioned Hines as a senior advisor. He will serve as CEO of a new company , Tether USA₮ , which will apply to become an issuer under the GENIUS Act.
CeFi as the cornerstone of DeFi legislation is too risky
The 2022 FTX debacle showcased to the crypto industry how CeFi (CeFi) can be a hotbed for bad actors. Sam Bankman-Fried and Alameda Research secretly and illegally colluded to misuse user funds. Ultimately, FTX was forced to file for bankruptcy due to insufficient liquid assets to cover withdrawals, resulting in billions of dollars in losses. It's crucial to remember that this triggered a series of liquidity crises caused by inter-company lending within CeFi, leading to bankruptcy filings for companies like Voyager, Celsius, and BlockFi.
In the face of market turmoil, non-custodial DeFi protocols like Uniswap and Curve have demonstrated strong resilience. While CeFi platforms on the brink of collapse rapidly lost funds, they continued to process transactions uninterruptedly, providing necessary and safe exit channels for funds.
Centralized companies have faced similar problems. In 2018, Tether was accused of providing collateral for its stablecoin to its sister exchange, Bitfinex, to cover a hole in its balance sheet without informing investors or customers. The company ultimately paid an $18.5 million fine and settled the charges with the New York Attorney General. Then, in 2022, the TerraUSD stablecoin/LUNA DeFi ecosystem, once valued at $40 billion , collapsed when the elaborate financial engineering and secretive trading system backing the asset failed to maintain its peg. The project's founder, Do Kwon, pleaded guilty in August to two counts of conspiracy to commit wire fraud and wire fraud in the United States. Even Circle faced a depegging crisis in 2023 when $3.3 billion worth of its USDC collateral became trapped at Silicon Valley Bank.
Despite this history, CeFi remains a “comfortable” starting point for regulators because its business structure often resembles that of traditional financial companies. But this is not the foundation on which DeFi legislation should be built.
How to protect decentralization
As Witt adjusts to his new role, protecting decentralization is more important than ever. With the GENIUS Act now behind him, focus is turning to long-awaited market structure legislation, which will determine key issues such as whether the U.S. Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC) has regulatory primacy.
At the heart of this debate is determining how a project can be considered decentralized. While much of the industry agrees that the 79-year-old Howey Test—a legal framework for determining whether something is a security—is outdated in the cryptocurrency space, finding an adequate replacement that allows for innovation while ensuring that true securities comply with the law is crucial.
The draft CLARITY Act (market structure legislation) recently passed by the US House of Representatives would allow projects to self-certify as decentralized . While this appears positive, it could confuse regulators and the industry about the definition of "decentralization." A better approach would be to clarify the legislative language in the bill, focusing on decentralization based on protocol control . Ideally, I would also like to see the bill support community governance of projects by recognizing token-based voting and decentralized autonomous organizations (DAOs), especially when proposing significant substantive changes to the protocol.
This last point is especially important given that more and more projects are abandoning DAO governance under the new administration.
Don't be fooled by empty words
As we head into fall, key decision-makers in Washington, D.C., are saying the right things, but decentralization remains under attack.
On July 31st, the SEC launched Project Crypto , a new initiative aimed at rewriting outdated rules, modernizing digital asset legislation, and bringing U.S. financial markets online. SEC Chairman Paul Atkins called it the new "North Star" for the agency, which has historically taken a hardline stance on the crypto industry, leading many to be bullish on the future of cryptocurrencies.
In line with this, Atkins advocates for an “ innovation exemption ,” a policy that would exempt new technologies and business models from onerous regulatory requirements that don’t neatly align with existing SEC rules and regulations.
In Chairman Atkins' speech announcing the "Crypto Project," the words "innovation" and "innovators" appeared over 20 times. He even said, "The SEC will not stand idly by while innovation develops overseas while our capital markets stagnate."
However, less than a week after Atkins announced his "crypto project," Roman Storm, co-founder of the privacy protocol Tornado Cash , was convicted on August 6th. According to charges filed by the U.S. Department of Justice (DOJ), he was found guilty of "knowingly and willfully operating an unlicensed money transmitting business," sending a chill through the industry.
Why is decentralization important?
The word "decentralization" is thrown around a lot these days, but it's important to remember why it's so crucial. Decentralization shifts power dynamics: it prevents a single entity or government from dictating rules, distorting markets, or expropriating funds. Decentralization is democratizing: it promotes user control, transparency, accountability, and resilience . In fact, the U.S. Constitution itself—with its checks and balances, separation of powers between branches of government, and deliberate protections for individual rights—is a sustained and remarkably successful example of decentralization.
Nominal support for a cryptocurrency, such as underwriting a Bitcoin vault company , does not make someone a proponent of decentralization. Putting Bitcoin into a centralized company and having people buy shares rather than owning the Bitcoin itself renders the chain’s decentralization meaningless.
A Bitcoin strategic reserve is not much better; it simply exchanges ownership from centralized companies for custody by a central government.
If the industry continues to tolerate centralized structures disguised as promises of a “decentralized future,” it risks making this fatal mistake again.
