As the cryptoverse debated a US bill on Wednesday that would “kill DeFi,” crypto mogul Sam Bankman-Fried launched a set of self-imposed industry standards to “create clarity and protect customers.”
DeFi purists weren’t amused by the twin threats.
Gabriel Shapiro, general counsel at Delphi Labs, leak a 2022 Digital Products Consumer Protection Bill, or DCCPA.
A ban on DeFi
The DCCPA would appoint the Commodity Futures Trading Commission to oversee the spot crypto market, a much-welcomed move as the CFTC is seen as a more lenient enforcer than the US Securities and Exchange Commission.
Yet Jake Chervinsky, head of policy at crypto lobbying group The Blockchain Alliance, doesn’t quite see it that way. “This bill could be interpreted as a ban on DeFi,” he said. said in September of an earlier version of the legislation.
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In a blog post, Bankman-Fried, the head of centralized crypto exchange FTX, suggested building regulatory compliance into the DeFi protocols themselves. Such a move, which is common in self-regulated market organizations such as Finra, the Financial Sector Regulatory Authority, can be a costly and time-consuming process that takes years to implement.
More poignantly, such a regime is sure to offend DeFi proponents who shun the idea of centralized oversight.
Several prominent crypto-focused accounts on Twitter speculated that Bankman-Fried was secretly pushing for the bill to pass.
“FTX is spending money to push legislation through congress that could force defi protocols to operate like centralized exchanges,” Scott, the unnamed founder of DeFi Pulse, said. tweeted. “The proposal is called the Digital Products Consumer Protection Act. a better name would be the Digital Commodities FTX Protection Act.
Coupled with his self-regulatory stance, the rumors made Bankman-Fried an object of scorn on Web3.
Zero regard for development
“SBF is blatantly trying to kill DeFi and decentralization in general,” zefram, from NFT Market Sudoswap, tweeted. “SBF, FTX, and Alameda have repeatedly demonstrated that their only goal is to extract as much value as possible from crypto without worrying about its development.”
Bankman-Fried admitted that his suggestions were only meant to rekindle the discussion and that they may have been poorly worded.
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“Keeping DeFi and peer-to-peer transfers free is crucial. There are policies that I honestly think are key to achieving this. I could be wrong about these policies – I’m probably wrong about some! he wrote. “Allowing the *ability* of DeFi to ultimately interface with regulated entities, when poorly worded, could be interpreted as implying a need. And to be clear, I don’t think that should be necessary.
A representative for FTX did not immediately respond to a request for comment.
Still, lawmakers need to “understand how strong opposition to DCCPA’s latest published draft has been within the DeFi community, and why,” Chervinsky wrote on Twitter Wednesday.
This bill states that trading facilities “will provide a centralized marketplace for the execution of trades,” Chervinsky noted. “What does this mean for DeFi protocols? Wallets? Apps? Users? Unclear.”
The bill defined “digital commodity merchant” as “a person who creates a market for a digital commodity.”
“Does this mean that every liquidity provider in a DEX AMM protocol must register with the CFTC? It just can’t be,” Chervinsky wrote.
It was unclear how much that language had changed in Shapiro’s leaked version of the bill. But several crypto organizations came out in opposition during the week, including Alliance, a training program for Web3 founders.
According to Alliance, the bill “forces human intermediation,” “forces projects to sacrifice decentralization,” and ultimately “kills DeFi.”
“The bill does not specifically mention DeFi”, Alliance wrote in a widely quoted Twitter thread.But that would likely result in DeFi projects being classified as “digital commodity platforms” and decentralized exchanges, such as Uniswap, as “trading facilities.”
“The rules that apply to platforms and facilities assume – and indeed require – human activity at the center of the project, effectively prohibiting decentralization and therefore DeFi,” Alliance wrote. “For example, the bill would require that each [decentralized exchange] have emergency powers that provide the power to liquidate or transfer positions as well as suspend trading in a particular digital product “in consultation or cooperation with” the CFTC.
Alliance continued, “The bill creates a compliance architecture that precludes the concept of a smart contract system operating a decentralized infrastructure with little or no reliance on human activity.”
Alliance warned that the bill could pass as part of year-end omnibus legislation.
As for Bank-Fried’s blog post, he positioned it as an “industry standards handbook,” or a set of standards governing best practices. It’s an age-old approach in traditional finance, but it’s foreign to the core ethics of DeFi.
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“Ideally, an industry group would think about these topics, revise them and publish what they believe to be an appropriate set of community standards!” he wrote.
Perhaps most controversially, the blog calls for “blocklists” that would ban transfers and freeze funds associated with financial crimes.
“There should be an on-chain list of sanctioned addresses, updated in real time, maintained either by OFAC or a responsible actor,” Bankman-Fried wrote, referring to the US regulatory agency that placed the Tornado Cash privacy protocol on a list. sanctioned entities in August. “Then, centralized and decentralized applications can query, in real time, the list of sanctioned addresses, to avoid transferring funds or accepting funds from these addresses.”
Such a list should be transitive so that anyone interacting with sanctioned wallets is added to the list. This would prevent sanctioned entities from avoiding sanctions by generating and sending crypto assets to a brand new wallet.
“There should also be a way to heal your address if flagged funds are sent to it unilaterally,” Bankman-Fried added, anticipating downside to the proposal. “There should be a ‘frozen funds’ address – possibly a burn, possibly maintained by OFAC – that you can send contaminated funds to if you receive them, correcting your address.”
Tokenization of shares
Bankman-Fried recommended licensing entities that create and maintain websites that provide users with access to DeFi protocols and that market DeFi products to retail investors.
He also suggested industry standards to combat hacks, listing of assets on exchanges, stock tokenization, disclosure, and stablecoins.
The suggestions were poorly received within the crypto community.
“Sam. With respect. It absolutely sucks,” Ryan Sean Adams of the Bankless Podcast wrote. “It would knock the United States out of the crypto race.”
Others were less generous.
“Sam is a man who built his fortune running a 100x gd leveraged perpswap exchange that did no KYC and marketed himself to retail noobs through a marketing campaign of hyper aggro affiliation”, Scott, the co-founder of DeFi Pulse, tweeted. “Now he wants you to believe he definitely kills to protect those same people. Yeah, of course.”
Shapiro, the general counsel for Delphi Labs, suggested an alternative set of crypto-friendly regulations.
“For DeFi, there should be a detailed notice and disclosure regime – no permission/blocking by regulators, no, you can only launch if you follow ‘principles’ etc.”, a- he writes. “Just disclose all material facts, file them publicly, keep up to date, be responsible for fraud if wrong.”