Is SBF wrong? 3 Arguments Against SBF’s Proposed Crypto Regulation

By Ben Giove

Source: Bankless

The days of the crypto wild west appear to be coming to an end.

The bull market that drove the growth of the crypto industry in 2021 has grown to the point that regulators cannot ignore it. They are now scrambling to gain turf and establish themselves in the industry.

It appears that crypto regulation is inevitable. That's not necessarily a bad thing, as regulatory clarity will free builders from worrying about government action while paving the way for more capital to enter the space.

However, for the crypto industry to realize its potential, it is critical to strive for policies that preserve, rather than erode, the core values of the space.

Otherwise, what's the point? We risk creating a world where DeFi is as unfair as TradFi.

Last week, FTX CEO Sam Bankman-Fried (SBF) brought the battle between real-world law and metaverse principles to a head with an article titled “ Possible Digital Asset Industry Standard .”

The document outlines an approach to regulation and self-regulation of the industry on several fronts, including hack repayments, asset listings on centralized exchanges, DeFi and stablecoin regulation.

There are many sensible policies. But some of the SBF’s proposals run counter to the values of the crypto industry and threaten to hinder crypto innovation within the United States.

1. Sanctions, whitelists and blacklists

Speaking of address censorship, I agree with Sam that a blacklist is certainly preferable to a whitelist.

However, the choice between a blacklist and a whitelist is a false dualism.

Requiring applications and protocols to consult blacklists to accept transactions undermines their credible neutrality and creates a dangerous precedent where censorship becomes the norm.

Our crypto veterans RSA and Erik Voorhees responded well to this part, and SBF himself acknowledged it in a recent tweet.

2. KYC DeFi

When it comes to DeFi, I agree with Sam in many ways.

For example, he clearly states that “decentralized code is speech” and that both smart contract deployment and transaction verification should remain “permissionless and free.”

However, when it comes to his views on the front end, there are some differences.

For example, Sam said:

If you build a website with the goal of facilitating and encouraging the US retail industry to connect to and trade on DEXs, that website could end up being something like a brokerage/FCM etc.

This "may also have KYC obligations".

But implementing KYC on the front end goes against the spirit of DeFi.

Although users with technical knowledge can still interact with the protocol at the contract level, this requirement will limit the user base of DeFi and prevent those who do not have access to financial services from using these very valuable technologies.

Additionally, this requirement will significantly increase the compliance costs of the protocol and third-party front-ends such as Zapper or Zerion.

Not only would this push DeFi to markets outside of the US, it would also reduce the resilience of the space, as limiting the number of front-ends would increase the size of a hacker’s honeypot while reducing censorship resistance.

3. Stable currency regulation

In the last part of his article, Sam talks about the regulation of stablecoins.

Once again, Sam makes some valid points. For example, he advocates for dollar-pegged stablecoins to be backed at least 1:1 with the U.S. dollar or U.S. Treasuries while adhering to transparent reporting requirements.

This requirement makes perfect sense for centrally-issued custodial stablecoins, as it reduces risk while increasing transparency, but it’s unclear whether this would apply to crypto-collateralized stablecoins such as DAI.

In this regard, a point worth noting is in the last paragraph, which states that traders should be required to KYC when minting or redeeming stablecoins:

Traders involved in the deposit/withdrawal process should be KYC'd (i.e. KYC'd to individuals and entities that create and redeem stablecoins). This is easily rectified - we believe there are many suitable regulatory frameworks within which stablecoin initiatives can be pursued - provided the operating entity maintains relevant asset information and has and enforces proper KYC requirements.

While there is no mention of restrictions on purchasing stablecoins in the secondary market, this rule is still highly exclusive and creates on-chain inequality.

For example, non-KYC users will not be able to use their ETH as collateral to mint DAI, limiting their ability to unlock the full value of their holdings.

This would set a dangerous precedent, as it instantiates a system of have-nots and have-nots, rather than one that is credibly neutral and where everyone is treated equally.

Essentially, this means that only licensed individuals can use the full power of DeFi.

open dialogue

To its credit, the SBF is open to community input and discussions around these policies. He has even revised some of his positions amid community resistance.

But if implemented, several of the recommendations in his article would undercut the fundamental principles upon which DeFi was built, while risking stifling innovation and forcing builders to leave the country.

Regulation is coming.

But it is vital that we speak our minds so we can ensure that the policies put in place are the right ones.