Regulation
Is FTX’s Sam Bankman-Fried right about DeFi regulation?
Speaking to Politico last week, Sam Bankman-Fried, the billionaire founder of FTX and Alameda Research, said he had significantly revised his outlays for political campaigns. He said his previously stated plan to spend more than $1 billion was a “stupid quote.”
Year to date, SBF has spent approximately $40 million supporting Democrats and Republicans running political campaigns from coast to coast. That spending appears to have paid off so far, per CNBC report the majority of Bankman-Fried’s political recipients advanced in the primary election. But the former Wall Street analyst believes there is a limit to what money can buy in the general election.
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“At a certain point, once you get your message out to voters, there’s not much else you can do,” Bankman-Fried said in Political interview. “You can spend more time on it and more messages, more money, more whatever [but] you’re not accomplishing anything more.
Much has been written about Bankman-Fried and “effective altruism,” the political theory to which he subscribes that people create giftable wealth by making targeted donations now, or through the magic of compound interest, founding well-endowed charities later in life. .
I guess he feels his money is better spent elsewhere than on a TV commercial in Scranton, Pennsylvania. But where will his money and influence go? The problem with effective altruism is that it is a way of thinking that allows people to rationalize any of their actions.
Bankman-Fried’s political pragmatism was also displayed in her recently released crypto-regulation manifesto “Possible digital asset industry standards.” The blog, what SBF called “an industry rulebook,” outlined a path for self-regulation of the cryptocurrency industry. Somewhat surprisingly, SBF’s industry prescriptions were widely panned.
He covered seven areas where cryptocurrencies could write rules for themselves while waiting for clearer regulations from above. Some are very simple: more information on cryptocurrency advertising, regular checks for cash-backed stablecoins, and a three-step checklist for cryptocurrency exchanges that determine whether a token they want to list is a security.
Others show how cryptocurrencies have infected SBF: he wants a standard where hackers are guaranteed 5% of the reward if they exploit a protocol, assuming they pay back the rest. (This could incentivize more ethical hacking, one of the ways code enthusiasts think the industry will literally evolve.)
But SBF got into trouble on social media when he wrote about decentralized finance (DeFi). He proposed an “eligibility test” that would limit access to cryptocurrencies, much like rules for qualified investors based on net worth and other factors in the traditional market. This goes against the prevailing open source ethos of cryptocurrencies: equal access for all.
It also initially proposed a licensing system for websites that interact with DeFi and other crypto protocols, and an automatic blacklist to prevent sanctioned players from using centralized services. Adam Cochran of Synthetix and Yearn Finance called the rules “a moat that allows centralized entities to control at least part of the flow to DeFi.”
In response to the draft, many noted that SBF seemed less interested in the freedoms offered by DeFi than the centralized revenue that companies can milk from the sector. Industry gossip site Rekt, who wrote that he was “positioning himself as the US government-approved custodian” for cryptocurrencies, and was elsewhere being compared to a drug kingpin.
The most convincing arguments came from Erik Vorhees, founder of Bitcoin OG and ShapeShift, who noticed self-imposed rules and blacklists would only serve established exchanges that could afford to pay to comply. “You can support effective altruism, or you can support excluding 80 million innocent Iranians from the future of global finance,” Voorhees tweeted. “You can’t do both.”
SBF took the criticism in stride, reworked parts of its draft, and wrote a lengthy Twitter thread addressing the particular concerns of several critics. The crux of the debate, however, cannot be clarified. SBF is a realist who sees regulation coming and wants to help shape it.
This will always offend ideologically driven cryptocurrency advocates, who see cryptocurrency itself as a means to improve the world. For its part, SBF has never fully embraced the crypto mentality – and has said so in several recordings. For him, cryptocurrencies are a means to an end: creating wealth so that those funds can be redirected. (Remember the infinity of DeFi The “box” fiasco?)
Although there has still been criticism of the SBF’s toned down draft clarified that he was talking about centralized accesses to encryption, not self-executing protocols. “This is not a statement about what DeFi developers, smart contracts and validators need to do,” Bankman-Fried wrote. “It is looking to possibly establish guidelines on how, for example, FTX’s platform – or Fidelity’s – could interface with DeFi contracts.”
The debate over whether cryptocurrencies should capitulate and erect barriers to entry in the name of protecting the uninformed is really just beginning. Concessions have been made and will continue to be made, but in the end it doesn’t matter whether you are a pragmatist or an ideologue as long as the code works. (This is part, but not the whole reason, of why BitBoy Alex Jones style unleashing that SBF sells itself out on “clothes…with deep pockets” is ridiculous.)
Responding to its critics, SBF noted that the industry must keep peer-to-peer transfers and blockchain validation censorship resistant. This has little to do with whether websites or front ends block users or whether DeFi applications follow US Treasury Department sanctions. The question is: where do you want to commit? Where does it really matter? Is Cryptocurrency in the “Primaries” or the “General”?