Sam Bankman-Fried presents “Sanctions, whitelists and blacklists” in Crypto

FTX CEO Sam-Bankman Fried thoroughly broke down his ideal regulatory framework for the crypto industry on Wednesday.

The billionaire said he is a supporter of regulation using blacklists or blocklists, a model where individuals can act freely unless explicitly sanctioned. This is in contrast to whitelists or approval lists where individuals are barred from trading by default unless express permission is given.

“We need fast, reliable lists of addresses linked to illicit finance,” so CEO. “However, peer-to-peer transfers should generally be free as long as they do not go to sanctioned actors.”

In a more detailed document on FTX’s website titled “Possible Digital Asset Industry Standards”, the exchange – likely channeling its top executive – further argued that using approval lists would be a massive burden on innovation and trading that “frees out the economically disadvantaged.” On the other hand, the exchange noted, allowing all transfers would open the floodgates to financial crime.

Blocklists, it is argued, strike a much healthier balance between the two.

“This can simultaneously enforce sanctions compliance effectively while ensuring you don’t need a passport and social security number to buy a bagel from 7-11,” SBF said.

However, enforcing compliance with such sanctions can be difficult in practice. FTX addressed the issue of timing. “What happens if funds from illegal financial activities are moved after the activities are detected but before it is communicated to all the platforms?” asked the servant.

When it comes to the blockchain, crypto addresses do not equal users. Stolen funds can be transferred through a virtually infinite number of addresses, with little way of knowing who each address belongs to. That leaves exchanges with the tough task of continuously monitoring which addresses are linked to illicit funds and blacklisting them accordingly.

Even that creates its own set of problems. In August a Twitter troll dusted down hundreds of high-profile addresses with small amounts of “tainted” Tornado Cash ETH, shortly after the privacy protocol was sanctioned by OFAC, creating a legal mess for the unwitting recipients.

FTX proposed that OFAC create an address specifically for potential dust victims to send their illicit funds to, thereby “curing” their address from blacklist status.

The exchange also recommended that “trusted actors” maintain their own lists of addresses suspected of being related to financial crime, but which are still legal to trade with.

“In other words: sending sanctioned funds is sanctioned; receiving them should come with an opportunity to cure,” it concluded.