FTX CEO Sam Bankman-Fried Shares His Position on Crypto Regulations

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FTX CEO Sam Bankman-Fried (SBF) post­ed a draft of a set of stan­dards to cre­ate clar­i­ty and pro­tect cus­tomers as the US awaits full fed­er­al reg­u­la­to­ry regimes.

While high­light­ing the sig­nif­i­cance of reg­u­la­to­ry over­sight and cus­tomer pro­tec­tion, SBF said there needs to be an open econ­o­my where peer-to-peer trans­fers, code, val­ida­tors, etc., are pre­sump­tive­ly free. He believes estab­lish­ing stan­dards is nec­es­sary until reg­u­la­tion hit the scene to help inform and pro­tect customers.

SBF’s Guidelines

The draft deems “block­lists” as the cor­rect approach to sanc­tions com­pli­ance on blockchain envi­ron­ments. While enabling all trans­fers could poten­tial­ly facil­i­tate sig­nif­i­cant finan­cial crimes, SBF believes main­tain­ing a block­list con­tain­ing illic­it address­es is a good bal­ance in pre­vent­ing such crimes. Oth­er­wise, they could allow peer-to-peer com­merce, pro­vid­ed they don’t engage with sanc­tioned entities.

OFAC or a respon­si­ble actor should also keep a real-time updat­ed on-chain list of sanc­tioned address­es to ensure cryp­to enti­ties avoid trans­fer­ring funds to or accept­ing funds from them. Addi­tion­al­ly, SBF sug­gest­ed the need to cure the recip­i­ent address if flagged funds from sanc­tioned address­es are uni­lat­er­al­ly sent to it. Mean­while, trust­ed actors in the dig­i­tal asset ecosys­tem should have their on-chain list of address­es that are sus­pect­ed to be asso­ci­at­ed with finan­cial crime.

To reduce the impact of hacks, SBF stat­ed that major trust­ed par­ties should add address­es asso­ci­at­ed with secu­ri­ty breach­es to their pub­lic list of “sus­pi­cious address­es” to enable cen­tral­ized and decen­tral­ized pro­to­cols to prompt­ly freeze asso­ci­at­ed ones.

A nego­ti­a­tion between the hack­er and the affect­ed pro­to­col takes place dur­ing cer­tain secu­ri­ty breach­es. While SBF said a deal that involves offer­ing a gen­er­ous bug boun­ty to the hack­er for iden­ti­fy­ing the vul­ner­a­bil­i­ty in the pro­to­col does not sound bad, he argued that such nego­ti­a­tion is often “stress­ful and con­tentious” in prac­tice. He pro­posed a new com­mu­ni­ty stan­dard – “the 5–5 stan­dard” – to pro­tect the cus­tomer funds above every­thing else.

For the FTX CEO, decen­tral­ized finance (DeFi) has been the “trick­i­est” area to get right. He pro­posed a rough reg­u­la­to­ry heuris­tic to use with the space that involves no over­sight for upload­ing code to the blockchain.

The val­ida­tors’ core duty is to cor­rect­ly val­i­date blocks and “not to judge or police them.” But the require­ment of license and reg­is­tra­tion comes into the pic­ture whole host­ing a web­site that pro­vides a US retail front-end for decen­tral­ized pro­to­cols as well as mar­ket­ing DeFi prod­ucts to retail investors in the country.

Weigh­ing in on the com­plex nature of the space, SBF said,

“fig­ur­ing out how and where DeFi and things tan­gen­tial­ly relat­ed to DeFi do and don’t fit into reg­u­la­to­ry con­texts is a hard prob­lem, and one on which there is not yet firm­ly set­tled thought.”

Until there is an explic­it reg­u­la­to­ry frame­work, Bankman-Fried under­scored the need for “up-to-date pub­lic infor­ma­tion and audits to con­firm that dol­lar-backed sta­ble­coins are, in fact, backed by the dol­lar.” He sug­gest­ed the KYC of the traders par­tic­i­pat­ing in the on-ram­p/off-ramp process.

Community Feedback

The premise of the sanc­tions sec­tion by the cryp­to bil­lion­aire was not wel­comed by many. Some con­tend­ed that the sanc­tions set up in the guide­lines “removes the entire val­ue of Web3.” Anoth­er user argued that the pro­posed draft would steer the space, which was meant to bring finan­cial rev­o­lu­tion, into an already exist­ing finan­cial system.

Ban­k­less founder Ryan Sean Adams believes the draft that states – DeFi should be “OFACed,” on-chain freez­ing should be nor­mal­ized, and DeFi’s front-ends require­ment to reg­is­ter as a bro­ker-deal­er – is not rea­son­able and would end up elim­i­nat­ing the US from the cryp­to race. He fur­ther went on to say,

“The solu­tion isn’t to apply the old CeFi rules to DeFi. The reg­u­la­tion should approach DeFi from first principles.”

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