Brace yourself Defiers: Government regulation in the U.S. is looking more and more like an inevitability.
On July 27, the U.S. Senate Committee on Banking, Housing and Urban Affairs conducted a hearing to explore potential regulation needs for the cryptocurrency sector. The hearing, titled “Cryptocurrencies: What are they good for?,” largely centered around whether or not the industry’s claims of “decentralization” actually hold up to scrutiny.
And for many senators in DC, the answer seems to be ‘NO.’ Senator Sherrod Brown, who headed the hearing, even likened the claims of decentralization and democratization in crypto to the “phony populist marketing brought to us by people that have immense power in the marketplace.”
Pockets of Power
One of the expert witnesses, Angela Walch, a professor of law at St. Mary’s University School of Law and Research Associate at University College London’s Centre for Blockchain Technologies, actively advocated for regulation.
“The term decentralized can really be misleading to us,” said Walch. “If we stop at the label of decentralized because this is just crypto and that’s the way it is, then we miss looking into these systems and seeing the concentrated pockets of power within them.”
Walch pointed to core software developers responsible for creating and maintaining blockchain protocols as one of these pockets of power.
“We’ve seen this again and again when there have been critical bugs identified in crypto systems and the four or five software developers have to make a decision about how to handle it for the multi-billion dollar system,” she said.
Scrutiny on Miners
Walch also cited miners exploiting their positions of power within proof-of-work blockchain networks like Ethereum, comparing Miner Extractable Value (MEV) to bribery. MEV — wherein miners extract extra profits by reordering, including or excluding transactions from a block — is considered by many to be a major issue within the DeFi space.
Projects like Flashbots, an open-source research and development organization focused on building tools to analyze and extract MEV, aim to help tackle this issue, but there is no perfect solution yet.
Walch suggested to the Senate committee that the best solution may be increasing scrutiny on miners.
Another expert witness, Coin Center’s executive director Jerry Brito, provided the senators with a counterpoint. “The same problem exists in traditional financial markets. It’s why high-speed traders build proprietary infrastructure to get their trades in as soon as possible,” Brito said.
“Super Coders and Miners”
Senator Elizabeth Warren agreed with Walch’s take, saying, “Instead of leaving our financial system at the whims of giant banks, crypto puts the system at the whims of some shadowy, faceless group of super coders and miners, which doesn’t sound better to me.”
DAOs, or decentralized autonomous organizations, are intended to democratize decision-making, attempting to solve this issue. Still, DAO votes tend to be weighted towards token holdings, meaning that the wealthiest users with the most tokens can gain outsized influence within the organization. Depending on token distribution, the developers, miners, investors and other powerful community members can gain heavy influence even in a DAO.
While the DeFi community may largely disagree with the Senate committee’s takeaway, not to mention any potential regulatory action, this might be a good time for some introspection.
Terms like “decentralization” need to be used carefully when power can still be consolidated among small groups of people. And if the industry itself doesn’t figure out how to fix some of its issues, lawmakers in government appear to have no problem stepping in.