FTX’s Sam Bankman-Fried pens ‘Crypto Regulation for Dummies’

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FTX supports government-imposed ‘blocklists’ of sanctioned ‘crypto’ addresses, part of the latest effort by founder Sam Bankman-Fried (SBF) to lobby U.S. lawmakers into crafting FTX-friendly regulations.

On October 19, SBF tweeted his “current thoughts on crypto regulation” alongside a more detailed set of Possible Digital Asset Industry Standards posted to the policy page of the Bahamas-based cryptocurrency exchange’s American offshoot FTX.US. The proposals build on SBF’s appearances before Congress to press legislators to adopt ‘light touch’ regulations governing digital assets that reward FTX and hobble its rivals.

While stressing the ‘draft’ nature of his proposals, SBF “fundamentally” supports ‘blocklists’ as “the correct approach to sanctions compliance on blockchain environments.” Pooh-poohing the idea of an ‘allowlist’ that would require users to opt in to peer-to-peer transfers, SBF advocates for “prohibiting illegal transfers and freezing funds associated with financial crimes while otherwise allowing commerce.”

SBF believes “everyone should respect” the lists of digital addresses flagged by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) as tied to violations of economic and trade sanctions. ‘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 American 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 “unconstitutional.”

SBF suggests that OFAC establish “an on-chain list of the sanctioned addresses, updated in real time” so that “centralized applications” like exchanges—unlike those decentralized finance rapscallions—can avoid interactions with wallets tagged with OFAC’s scarlet letter.

SBF makes an exception for so-called “dusting attacks,” in which malicious actors send tiny amounts of tokens from sanctioned addresses/entities to other addresses that didn’t solicit such gifts. SBF recommends the creation of a “frozen funds” address to which unsolicited tokens can be redirected, thereby “curing” one’s temporarily tainted address.

SBF also suggests that “trusted actors” (ahem) establish and maintain a separate on-chain list of addresses “suspected to be associated with financial crimes.” There wouldn’t necessarily be legal ramifications for interacting with these suspect addresses but “many people may find it useful to reference these lists” and it could “help with inter-exchange cooperation.”

SBF believes that if all of the above “were updated quickly and immediately on-chain, we could make reponses [sic] and asset freezing effectively instantaneous” while still permitting “general economic freedom.”

Hack, wheeze

SBF has previously likened DeFi mechanics to Ponzi schemes, particularly when DeFi projects issue their own tokens, even as FTX lists many of those same tokens for Ponzi victims to purchase. So, it’s a little ironic that his second policy recommendation includes his assertion that “customers must be protected above all else.”

That quote comes amidst SBF’s discussion of Hacks and Accountability, the former being “all too prevalent and large” while the latter is sorely lacking. Similar to his “trusted actors” suggestion above, SBF wants “major trusted parties” to formalize a list of blockchain addresses associated with security breaches. This would allow both centralized and ‘decentralized’ protocols to “promptly freeze out” the flagged addresses.

Bizarrely, SBF then suggests establishing a formula for hacked protocols to negotiate with their hackers over how much of the stolen loot the hacker gets to keep in exchange for returning the rest. SBF suggests that hackers could keep 5% of the funds they stole as a “bug bounty” but only if they agree to this formula from the start, not treat this as “a fallback option,” and return the rest within 24 hours.

That seems truly insane, unless SBF’s real goal is suggesting to lawmakers that DeFi is a dumpster fire in which the blood of innocents boils eternal. When your best-case scenario is ‘well, hacks are inevitable so we might as well negotiate with terrorists because that will in no way incentivize future hacks,’ one senses the implicit message that FTX’s centralized staking and lending offerings are a much safer option.

Tomato, tomahto

SBF’s third proposed standard addresses the ever-thorny issue of whether digital tokens are commodities or securities. SBF pleads for “legislative, regulatory or judicial clarity on this question,” but until then, FTX has decided that it will determine for itself what is and isn’t a security.

There really isn’t any proposed standard here, merely a pledge to publish “an informal registration-statement-like overview” of the tokens that FTX chooses to list and a gosh-golly-wow promise that FTX remains “excited” to work to resolve this thorny issue. We’re sure Securities and Exchange Commission honcho Gary Gensler is equally excited and suitably impressed by SBF’s get-up-and-go spirit to call off plans to require digital asset exchanges to follow the same rules as stock exchanges.

Tokenize everything

SBF thinks tokenizing equities is a good idea, partly because it “could 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 on which to earn trading commissions.

Honestly, it’s a bit rich for SBF to warn that delays in the current settlement system means some stock traders get liquidated. After all, most centralized exchanges routinely experience outages during periods of severe volatility—when token prices are falling, never when they’re rising—that leave customers unable to close leveraged positions, resulting in their liquidation.

Are you sitting comfortably? Then we’ll 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 proposes “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 be able to access the platform/product.

DeFi(nitely not biased)

Addressing DeFi directly, SBF dons his Solomon crown and tries to cut the decentralized baby in half. He equates writing code, deploying it to decentralized blockchains and validating blocks with “free speech, expression, and mathematical constructs.” Meanwhile, hosting websites that facilitate access to DeFi products and/or marketing these products should be “regulated financial activities.”

SBF believes this “reasonable” approach will allow “people to express their freedom” while offering regulators the chance to “enforce consumer protection and market integrity.” But his main advice is that this DeFi stuff is, you know, complicated, so please don’t make any new rules too fast, because our venture capital funders still have a crapload of crap tokens to unload on the plebs.

Stablecoins

SBF believes stablecoins “present a huge opportunity to modernize and democratize payments” but he has a few caveats. First, their issuers should “maintain up to date and public information and audits attesting” to the reserves backing their tokens. Second, traders directly receiving or redeeming stablecoins should be subject to know your customer (KYC) requirements that meet U.S. Bank Secrecy Act-level scrutiny.

A little context: Alameda Research, the SBF-owned/FTX-affiliated market-maker, is one of the largest recipients 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 multiple occasions flat out lying about its reserve assets.

SBF previously claimed that the ‘FUD’ (fear, uncertainty and doubt) about Tether “was never grounded 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 variety of serious infractions, including the fact that “for periods of time [Tether] held no reserves to back tethers in circulation at the rate of one dollar for every tether.”

Tether FUD was never grounded in truth.

It was always the easiest way to tell apart people who know crypto from the pretenders.

'grats @paoloardoino at all — hopefully now you can focus on building https://t.co/gmFUnv1jpO

— SBF (@SBF_FTX) February 23, 2021

So, either SBF/FTX/Alameda just finished redeeming their last USDT and now doesn’t care if Tether is exposed as a hustle—a stance perhaps shared by another major Tether recipient, given recent comments—or SBF has just decided to brazen this out in the hope that his new high-minded positions will make everyone else forget his previous support for what many regard as a criminal entity.

The reviews are in

Reaction to SBF’s proposals from the denizens of Cryptopia were loud and extremely critical, particularly on the issue of freezing assets on-chain. The primary criticisms lobbed SBF’s way were that he’s ‘anti-DeFi’ and biased towards centralized exchanges like his own.

Blockchain analysts Chainalysis recently reported that America leads the world in DeFi activity, claiming a 37% share to runner-up Europe’s 31%. SBF’s DeFi antagonists claim that ‘Murica’s frontrunner status would evaporate were legislators/regulators to heed his advice.

Meanwhile, Kraken’s Powell responded to yet another highly 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”. Ooh! Ooh! We know, Jesse! Why not try SBF’s ‘kumbaya’ schtick for a week instead of going scorched earth on everyone who doesn’t meet your exacting ‘freedom’ litmus tests?

New hit piece just dropped. Not linking because garbage. I just thought this was funny given the sentiment on this app today, the community's view vs the media's 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) October 20, 2022

Of course, there’s no guarantee that SBF’s suggestions will gain any transaction in Congress, particularly since his ‘white knight’ status just took a major hit after FTX was caught offering prohibited products/services to U.S. residents. In the meantime, no one can deny that his policy recommendations aren’t effectively altruistic, at least in terms of freely giving everyone a good chuckle.

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