Author: Alex Urbellis Source: unchainedcrypto Translation: Shan Ouba, Golden Finance
Alexander Urbelis is an internationally renowned technology lawyer and cybersecurity expert, a law professor at King's College London, and also the General Counsel and Chief Information Security Officer of the Ethereum Name Service (ENS). Alex bridges the gap between legal and technical expertise, and he is also an award-winning architect of a cybersecurity threat intelligence platform designed to identify signs of impending cyber attacks, impersonation, and other malicious activities.
In this article, he explores why Washington's progress in the cryptocurrency sector has failed to advance the cause of decentralization. He warns that if this practice is not corrected, it may be too late.
The United States is becoming the crypto capital of CeFi. This is why changes must be made.
During Bo Hines' tenure at the White House, he did not make much progress in the decentralized crypto space. How can his successor, Patrick Witt, become an advocate for DeFi?
When Bo Hines stepped down as the Executive Director of the President's Digital Asset Advisory Committee, he boasted that he was positioning “the United States as the crypto capital of the world” alongside the White House's AI and crypto czar David Sacks. However, his eight-month tenure (after which he moved to a highly centralized crypto company in a high-paying position) primarily achieved significant victories in the centralized crypto (CeFi) space. The biggest achievement was the passage of the GENIUS Act in July, which paved the way for centralized stablecoin companies like Circle.
This legislation has been mistakenly equated with support for decentralized finance (DeFi), but the truth is quite the opposite. Decentralization is being sidelined.
With Hines' deputy Patrick Witt taking over, Witt should demonstrate a profound understanding of decentralized power. Otherwise, the United States will face the risk of being trapped in a centralized finance (CeFi) structure.
The promise and power of cryptocurrency cannot be separated from its decentralized principles.
How the US Supports CeFi at the Expense of DeFi
The “GENIUS Act” only allows “licensed payment stablecoin issuers” to operate in the U.S., which greatly favors centralized companies like Circle. Broadly speaking, “licensed entities” means those that have received federal approval from the Office of the Comptroller of the Currency (a federal banking regulator) or an equivalent state regulatory body, established anti-money laundering (AML) and Bank Secrecy Act (BSA) compliance programs, and undergo regular audits. While decentralized companies can technically establish U.S. legal entities, obtain licenses, and meet all requirements, this would effectively make them centralized.
These restrictions give companies like Circle, which issues $73.55 billion USDC, a clear advantage. In fact, it seems that the global leader Tether (whose USDT scale reaches $171 billion) must catch up in the United States. The company recently hired the aforementioned Hines as a senior advisor, who will serve as the CEO of the 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 collapse of FTX in 2022 showed the crypto industry how CeFi can become a breeding ground for bad actors. Sam Bankman-Fried and Alameda Research colluded secretly and illegally, misusing user funds. Ultimately, FTX was forced to file for bankruptcy due to a lack of liquid assets to pay withdrawals, resulting in billions of dollars in losses. Crucially, we must not forget that this triggered a series of liquidity crises caused by inter-company lending within CeFi, leading to bankruptcies 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, continuing to process transactions without interruption and providing a necessary and secure exit for funds while CeFi platforms rapidly lose capital on the brink of collapse.
Centralized companies have faced similar issues. In 2018, Tether was accused of providing the collateral for its stablecoin to its sister exchange Bitfinex without informing investors or customers, in order to cover holes in its balance sheet. The company ultimately paid a $18.5 million fine, settling the charges with the New York Attorney General. Subsequently, in 2022, the TerraUSD stablecoin/LUNA DeFi ecosystem, which was once valued at $40 billion, collapsed due to the failure of its intricately designed financial engineering and secret trading systems to maintain its peg. The project's founder, Do Kwon, admitted in August to being guilty of two conspiracy charges of fraud and wire fraud in the United States. Even Circle faced a decoupling crisis in 2023, when its $3.3 billion USDC collateral was trapped in Silicon Valley Bank.
Despite this history, CeFi remains a “comfortable” starting point for regulators, as its business structure often resembles that of traditional financial firms. But this should not be the cornerstone upon which DeFi legislation is built.
How to Protect Decentralization
As Witter adapts to its new role, protecting decentralization is more important than ever. With the GENIUS Act becoming a thing of the past, the focus is shifting to the long-awaited market structure legislation, which will adjudicate some key issues, such as whether the SEC or CFTC has primary regulatory authority.
The core of this debate is to determine how projects are viewed as decentralized. The industry largely agrees that the 79-year-old Howey Test, a judicial framework for determining whether something is a security, has become outdated in the cryptocurrency space. However, finding a suitable alternative is crucial, one that allows for innovation while ensuring that true securities comply with the law.
Recently, the draft of the CLARITY Act passed by the U.S. House of Representatives (a piece of market structure legislation) allows projects to self-certify as decentralized. While this seems positive, it may confuse regulators and the industry regarding 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 through **recognition of token-based voting and decentralized autonomous organizations (DAOs)**, especially when proposing significant substantive changes to the protocol.
In light of the fact that more and more projects are abandoning DAO governance under the new government, this last point is particularly important.
Don't be deceived by empty talk
As we enter autumn, key decision-makers in Washington D.C. are saying the right things, but decentralization is still under attack.
On July 31, the SEC launched “Project Crypto”, an initiative aimed at rewriting outdated rules, modernizing digital asset legislation, and bringing U.S. financial markets on-chain. SEC Chairman Paul Atkins described it as the agency's new “North Star”. The agency has historically taken a tough stance on the crypto industry, which gives many people optimism about the future of cryptocurrency.
In line with this, Atkins advocated for the implementation of an “innovation exemption”, a policy that would exempt new technologies and business models from cumbersome regulatory requirements that do not fully align with existing SEC rules and regulations.
In Chairman Atkins' speech announcing the “crypto project”, words like “innovation” or “innovator” appeared more than 20 times. He even stated, “The SEC will not sit idly by and watch innovation develop overseas while our capital markets stagnate.”
However, just a week after Atkins announced the “crypto project” on August 6, Roman Storm, the co-founder of the privacy protocol Tornado Cash, was convicted. According to the charges from the U.S. Department of Justice (DOJ), he was found guilty of “knowingly operating an unlicensed money transmission business,” which sent chills throughout the entire industry.
Why is decentralization crucial?
Today, the term “decentralization” is frequently used, but it's important to remember why it matters. Decentralization changes the power dynamic: it prevents a single entity or government from setting rules, distorting the market, or seizing funds. Decentralization is democratizing: it promotes user control, transparency, accountability, and resilience. In fact, the U.S. Constitution itself—with its checks and balances, the division of power among government branches, and the deliberate protection of individual rights—is a lasting and quite successful example of decentralization.
Nominal support for cryptocurrencies, such as underwriting a Bitcoin vault company, does not make one a proponent of decentralization. Putting Bitcoin into a centralized company and allowing people to buy shares instead of owning the Bitcoin itself renders the chain's decentralization meaningless.
A Bitcoin strategic reserve is not much better; it merely replaces the ownership of centralized companies with custody by the central government.
If the industry continues to tolerate centralized structures disguised by the promise of “decentralization in the future,” it may risk committing this fatal mistake again.
