FTX’s Sam Bankman-Fried pens ‘Crypto Regulation for Dummies’
FTX supports government-mandated ‘blocklists’ of sanctioned ‘crypto’ addresses, part of the latest effort by founder Sam Bankman-Fried (SBF) to lobby US lawmakers to create FTX-friendly rules.
On 19 October, SBF became tweeted his “current thoughts on crypto regulation” along with a more detailed set of possible digital asset industry standards posted on the policy page of the Bahamas-based cryptocurrency exchange’s US affiliate FTX.US. The proposals build on SBF’s appearances before Congress to push lawmakers to pass “light touch” regulations governing digital assets that reward FTX and hobble rivals.
While emphasizing the “draft” of his proposals, the SBF “fundamentally” supports “blocklists” as “the right approach to sanctions compliance on blockchain environments.” Buzzing for the idea of a “whitelist” that would require users to opt-in to peer-to-peer transfers, the SBF advocates “prohibiting illegal transfers and freezing funds associated with financial crime while otherwise allowing trading. “
The SBF believes “everyone should respect” the lists of digital addresses flagged by the US Treasury Department’s Office of Foreign Assets Control (OFAC) as linked to violations of economic and trade sanctions. The ‘Crypto bros’ have become increasingly agitated in recent months as OFAC’s oversight intensified, targeting everything from coin mixers and Russian paramilitary groups to non-compliant exchanges.
SBF appears to be trying to paint FTX.US as a more compliant outfit than its U.S. rivals Coinbase, which has taken a far more antagonistic approach to OFAC’s actions, and Kraken, whose former CEO Jesse Powell called OFAC’s actions “constitutional.”
The SBF suggests that OFAC create “a chain list of the sanctioned addresses, updated in real time,” so that “centralized applications” like exchanges—as opposed to the decentralized finance rapscallions—can avoid interactions with wallets marked with OFAC’s scarlet letter.
SBF makes an exception for so-called “dust attacks”, where malicious actors send small amounts of tokens from sanctioned addresses/devices to other addresses that have not requested such gifts. SBF recommends the creation of a “frozen funds” address to which unwanted tokens can be redirected, thereby “curing” one’s temporarily tainted address.
The SBF also suggests that “trusted actors” (ahem) create and maintain a separate chain list of addresses “suspected of being associated with financial crime.” There won’t necessarily be legal ramifications for interacting with these suspect addresses, but “many people may find it useful to refer to these lists,” and it may “help with cooperation between exchanges.”
SBF believes that if all of the above “were updated quickly and immediately in the chain, we could come up with an answer [sic] and freezing assets effectively immediately” while still allowing “general financial freedom.”
Hack, wheeze
SBF has previously compared DeFi mechanics to Ponzi schemes, particularly when DeFi projects issue their own tokens, although FTX lists many of the same tokens that Ponzi victims can purchase. So it’s somewhat ironic that his second policy recommendation includes his claim that “customers must be protected above all else.”
That quote comes in the middle of SBF’s discussion of Hacks and Accountability, where the former is “far too widespread and large”, while the latter is sorely lacking. Similar to his “trusted actors” proposal above, the SBF wants “large trusted parties” to formalize a list of blockchain addresses linked to security breaches. This will allow both centralized and ‘decentralized’ protocols to “immediately freeze out” the flagged addresses.
Oddly enough, SBF then proposes to establish a formula for hacked protocols to negotiate with the hackers how much of the stolen loot the hacker gets to keep in exchange for returning the rest. SBF suggests that hackers can keep 5% of the funds they stole as a “bug bounty”, but only if they agree to this formula from the start, do not treat this as “a backup option”, and return the rest within 24 hours.
That seems truly insane, unless the SBF’s real goal is to suggest to lawmakers that DeFi is a cesspool where the blood of the innocent boils forever. When your best case scenario is “well, hacks are inevitable, so we might as well negotiate with terrorists because that will in no way encourage future hacks,” one senses the implicit message that FTX’s centralized betting and lending offering is a much safer alternative.
Tomato, tomahto
SBF’s third proposed standard addresses the increasingly difficult question of whether digital tokens are commodities or securities. SBF is asking for “legislative, regulatory or legal clarity on this issue”, but until then FTX has decided that it will decide for itself what is and is not a security.
There’s really no proposed standard here, just a promise to publish “an informal registration statement-like overview” of the symbols that FTX chooses to list and a gosh-golly-wow promise that FTX is still “excited” to work with solve this difficult problem. We’re sure Securities and Exchange Commission honcho Gary Gensler is equally thrilled and suitably impressed by the SBF’s get-up-and-go spirit to cancel plans to require digital asset exchanges to follow the same rules as stock exchanges.
Tokenize everything
SBF believes tokenization of shares is a good idea, in part because it “can help simplify securities settlement” and reduce the risk of retail investors losing out on paper profits. But mainly because it would give FTX more products to earn trading commissions on.
Frankly, it’s a bit rich for the SBF to warn that delays in the current settlement system mean some stock traders will be liquidated. After all, most centralized exchanges routinely experience outages during periods of severe volatility – when token prices fall, never when they rise – leaving clients unable to close leveraged positions, resulting in liquidation.
Are you sitting comfortably? Then we begin
SBF wants digital asset projects to improve transparency to better protect customers while establishing a model to determine the suitability of individual investors to purchase said assets. SBF suggests “knowledge-based quizzes” to determine whether investors have a solid grasp of the “mechanics of the platform and product.” Only those who pass the test will have access to the platform/product.
DeFi (probably not biased)
SBF is directly addressing DeFi, taking on the Crown of Solomon and trying to cut the decentralized baby in half. He equates writing code, distributing it to decentralized blockchains, and validating blocks with “free speech, expression, and mathematical constructions.” Meanwhile, hosting websites that facilitate access to DeFi products and/or promote those products should be “regulated financial activities.”
The SBF believes this “reasonable” approach will allow “people to express their freedom,” while giving regulators the ability to “enforce consumer protection and market integrity.” But his main advice is that this DeFi stuff is complicated, so please don’t make any new rules too soon, because our VCs still have a bunch of crap tokens to unload on the plebs.
Stable coins
SBF believes that stablecoins “present a huge opportunity to modernize and democratize payments”, but he has some reservations. First, their issuers should “maintain up-to-date and public information and audits certifying” the reserves backing their tokens. Second, traders who directly receive or redeem stablecoins should be subject to your customer requirements (KYC) that meet US Bank Secrecy Act level scrutiny.
A little context: Alameda Research, the SBF-owned/FTX-affiliated market maker, is one of the largest receivers of Tether (USDT) – the largest stablecoin by market cap – and Alameda sends virtually all of its USDT to FTX. Tether has never submitted to a formal third-party audit during its eight-year history, despite repeated promises to do so, and despite being caught on several occasions lying about its reserve funds.
SBF previously claimed that ‘FUD’ (fear, uncertainty and doubt) about Tether “was never rooted in truth.” For the record, that tweet was issued the same day that the New York attorney general fined Tether $18.5 million for a series of serious violations, including the fact that “for periods of time [Tether] had no reserves to support tethers in circulation at a rate of one dollar for each tether.”
The Tether FUD was never rooted in truth.
It was always the easiest way to separate people who know crypto from the pretenders.
‘Congratulations @paoloardoino at all — hopefully now you can focus on building
— SBF (@SBF_FTX) 23 February 2021
So either SBF/FTX/Alameda just finished redeeming their last USDT and now don’t care if Tether is exposed as a hoax – an attitude perhaps shared by another major Tether recipient, given recent comments – or SBF just decided himself to brazen this out in the hope that his new high-minded positions will make everyone else forget his previous support for what many see as a criminal entity.
The reviews are in
The reaction to SBF’s proposal from the citizens of Cryptopia was loud and extremely critical, especially on the issue of freezing assets in the chain. The primary criticism lobbed SBF’s way was that he is “anti-DeFi” and biased against centralized exchanges like his own.
Blockchain analysts Chainalysis recently reported that America leads the world in DeFi activity, claiming a 37% share to fellow Europeans’ 31%. SBF’s DeFi antagonists claim that ‘Murica’s frontrunner status would evaporate were legislators/regulators to follow his advice.
Meanwhile, Krakens Powell black to another very negative profile (this time in Forbes) by wondering why SBF doesn’t catch the same media flak: “If only I knew how to stop being a liability and be loved by the media like @SBF_FTX”. Oooh! Oooh! We know, Jesse! Why not try SBF’s ‘kumbaya’ schtick for a week instead of walking the scorched earth on anyone who doesn’t meet your exacting ‘freedom’ litmus tests?
New hit chip has just been released. Not connecting due to garbage. I just thought this was funny given the feeling on this app today, the community view vs the media view. If only I knew how to stop being a liability and be loved by the media like @SBF_FTX
Also, I hate babies now 🤣 pic.twitter.com/JnIPRKBQS5
— Jesse Powell (@jespow) 20 October 2022
Of course, there is no guarantee that SBF’s proposal will see any transaction in Congress, especially since his “white knight” status just took a big hit after FTX was caught offering prohibited products/services to US residents. Meanwhile, no one can deny that his policy recommendations are not effectively altruistic, at least when it comes to freely giving everyone a good laugh.
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