The FTX founder Sam Bankman-Fried aka SBF reveals his ideal regulatory framework for the digital asset industry. On Wednesday, SBF posted a draft that contained a set of standards that the crypto industry could enact to create clarity and protect customers while waiting for full federal regulatory regimes.
SBF wrote the draft and referred to it as an industry norms manual in an effort to build consensus.
In his post, SBF talks about:
- Sanctions, allowlists, and blocklists
- Hacks and Accountability
- Asset listing; also, what is a security?
- Tokenized equities
- Customer Protections, Disclosures, and Suitability
- DeFi
- Stablecoins
SBF fundamentally believes that blocklists are the correct approach to sanctions compliance in blockchain environments. Allowing all transfers opens up the door to significant financial crimes, and banning all transfers unless allowlisted grinds commerce and innovation to a halt and freezes out the economically disadvantaged.
So, maintaining a blocklist is a good balance: it prohibits illegal transfers and freezes funds associated with financial crimes while otherwise allowing commerce.
To tackle the hacking problem, SBF suggests that the crypto industry should formalize the flagging of addresses carrying funds from a security breach.
He suggests formalizing this with major trusted parties adding addresses associated with security breaches to their public list of suspicious addresses. Thus, both centralized and decentralized protocols will be able to promptly freeze out hacking associated addresses.
Whenever there is a security breach, there is often a negotiation between the hacker and the protocol. SBF also suggested a 5–5 standard for this scenario, where the exploiter keeps 5% of the whole hack or $5M, whichever is lower.
SBF is unsure of this standard and welcomes suggestions for further improvement.
Also Read: The Texas State Securities Board is Investigating SBF & FTX US
On asset listing and to provide clarity on what is security, until legislative, regulatory, or judicial guidelines are established, Sam plans to proceed with his own way with the help of the Howey Test and other relevant case law and guidance.
Sam claims that we’d end up in a place as an industry where being a security is not a bad thing; where there are clear processes for registering digital asset security which protect customers while allowing for innovation.
Sam thinks that tokenizing stocks could help simplify securities settlement, providing a stronger and more equitable market structure for retail.
According to Sam, the clearest way to help protect investors is to provide transparency and prevent scams. He thinks that investors should be given clear, comprehensible information describing the asset they are considering, and that regulators should crack down on any that misrepresent or make materially misleading marketing claims.
He also thinks that, as a default, systems should not meaningfully run on credit–especially for retail.
DeFi is crucial and is one of the trickier things to think about in the context of current regulatory frameworks.
Sam proposes that developers should not require financial license to upload code on blockchain, and validators don’t have to judge or police them, they just have to validate blocks.
He compares decentralized code to a speech and calls it free speech, expression, and mathematical constructs. He believes it is crucial that DeFi and on-chain code remain unrestricted, open, and free.
On talking about stablecoins he suggests that we should adopt regulatory policy that supports them, while protecting against any systemic risk.
In the end Sam noted that there should be KYC of the traders participating in the on-ramp/off-ramp process.
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