The Breakdown - The Debate Around SBF’s Regulatory Ideas

Episode Date: October 23, 2022

This episode is sponsored by Nexo.io, Circle and FTX US.   On this week’s “Long Reads Sunday,” NLW reads Sam Bankman-Fried’s “Possible Digital Asset Industry Standards.”   He also references Erik Voorhees “A Response to SBF and Principled Crypto Regulation” and a thread featuring Scupytruples.  - Nexo Pro allows you to trade on the spot and futures markets with a 50% discount on fees. You always get the best possible prices from all the available liquidity sources and can earn interest or borrow funds as you wait for your next trade. Get started today on pro.nexo.io. - Circle, the sole issuer of the trusted and reliable stablecoin USDC, is our sponsor for today’s show. USDC is a fast, cost-effective solution for global payments at internet speeds. Learn how businesses are taking advantage of these opportunities at Circle’s USDC Hub for Businesses. - FTX US is the safe, regulated way to buy Bitcoin, ETH, SOL and other digital assets. Trade crypto with up to 85% lower fees than top competitors and trade ETH and SOL NFTs with no gas fees and subsidized gas on withdrawals. Sign up at FTX.US today. - Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsors today is “War” by Enoch Yang and “The Life We Had” by Moments. Image credit: Craig Barritt/Getty Images for CARE For Special Children, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io, Circle, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Sunday, October 23rd, and that means it's time for Long Read Sunday. Now, before we get into that, if you are enjoying the show, please go subscribe to it, give it a rating, give it a review, or if you wanted to dive deeper into the conversation. Come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Also a disclosure as always, in addition to them being a sponsor of the show, I also work with FTX. And boy, oh boy, is that disclosure more relevant than ever today?

Because today we are going to read FTX CEO Sam Bankman-Fried's possible digital asset industry standards. Now before we do a little bit of setup. As regular listeners know, I believe we've entered the end game of the first big wave of U.S. crypto regulation. This is a process that started a little with the introduction of Facebook's Libra in 2019 and started a lot with summer 2020's battle over the infrastructure bill that really galvanized the crypto lobby. Since then, we've seen significantly more engagement. Politicians on both sides of the aisle have actually dug in deep, and promisingly, it's been one of the only issues to remain firmly anti-partisan, by which I mean that while there are, of course, some attempts to subsume it into other political priors by,

individual members of the parties, by and large, both allies and antagonists come from both sides of the aisle. There is, in more than just about any other issue I've seen, first principles thinking from politicians and their staffs. However, there are some really thorny issues. And one thing that's become clear over the last year is that given that this is a new industry with new challenges and opportunities, it really must be the elected officials in Congress and the Senate who are determining authority and new regulatory regimes, as opposed to appointed officials jockeying for power within their various agencies. The Biden administration threw in their hat this year with the executive order on digital assets, but did so in a thoughtful research alignment kind of

way versus a policy setting sort of way. And so a lot of the focus this year has been on what's going on in Congress. Multiple bills have been introduced, including the Responsible Financial Innovation Act from Senators Lummussen-Jillibrand. More recently, a lot of attention has been on the digital Commodities Consumer Protection Act or the DC CPA. The bill, introduced in August, among other things, would give the CFTC much more authority to regulate the industry as a whole. Now, for much of this year, this was seen as somewhere between being a positive and a lesser of two evils, relative to the other option being the SEC. However, when the CFTC decided to pursue legal action against Okie Dow, many and crypto started to shift some of that perspective.

CFTC Chair Benham has tried to make the case that the Okie Dow was so flagrant in the particulars that it had no choice but to act. However, it wasn't so much the details of what the members of Okie Dow were up to that got the crypto industry up in arms. Instead, it was the fact that the CFTC pursued actions against the Dow itself, even serving them through an automated response bot versus serving individual members or leaders of the Dow. A widely held perspective is that this was not just overreach, but an attempt to, A, win some default victory by not actually targeting an actor that could defend themselves in court, and B, in so doing, established precedent that expanded authority without real authorization for said expanded authority. It was, candidly,

the type of move that crypto had come to expect from Gary Gensler's SEC, but not Chair Benham's CFTC, and led to a big chunk of the crypto industry saying, hey, I wonder if the CFTC isn't all that much better. Now, if this is the background context, it is no secret that FTC, which is the company that I work for as the other thing I do besides this podcast, has been active in the regulatory discourse in Washington. This is not some secret, nor has it attempted to be, given that Sam has testified before Congress and the Senate about a half dozen times this year. I should also note at this point that nothing I do with FTX has anything to do with its regulatory or policy dealing, so nothing I'm discussing today has any privileged insight or really

any insight at all. If you want to talk about last year's Super Bowl ad or a Tom Brady spot, I'm your guy, but not when it comes to policy. Anyway, Sam is a fairly vocal and public CEO and has previously on Twitter expressed optimism for the DCCPA as potentially good legislation. Again, not a secret. However, over the last couple weeks, there has been a rising narrative of Sam and FTX are secretly lobbying for a bill that would kill Defi so everything has to go through FTX. This week, that narrative reached something of a fever pitch, and midweek, Sam decided to publish a set of thoughts that he called possible digital asset industry standards.

It incited something of a firestorm. A lot of my reflections on the first night of watching people respond was that, while I believe heartily that there is room for a ton of even very intense debate, it's hard for that discourse to be productive if people are just meming about what they think people think or what they believe others' motives are, rather than actually engaging at all with the words they've committed to page. That doesn't mean that just because you read something, you have to think that someone is saying the whole truth of what they think or what their incentives are, but at least when you're applying your grains of salt or bags of salt, you know what you're applying it to.

However, I recognize that words are long and take a long time to read and we're all busy. So, I thought I'd read Sam's thoughts for LRS. My goal is not to convince you of anything, and I know Sam wouldn't want that either. It's just to give you a chance to actually hear the words as they are rather than from a tweet or some absolutely unhinged Alex Jonesy and YouTube rant about the devil's and suits. After I'm done, I'll share a couple of the more substantive follow-ups. Possible Digital Asset Industry Standards This document contains a draft of a set of standards that we as an industry could enact to create clarity and protect consumers while waiting for full federal regulatory regimes.

Treat it as an industry norms manual trying to establish consensus. This is written by Sam Bankman-Fried, but neither he nor FTCS feel confident that this structure is exactly correct. It's just a draft. Ideally, some industry group would mull over these topics, revise them, and publish what they feel to be an appropriate set of community norms. And to be clear, nothing here is legal advice or meant to override any relevant laws. It's merely an attempt to create what clarity and protection we can in the meantime. Section 1. Sanctions, allow lists, and block lists. I fundamentally believe that block lists are the correct approach to sanctions compliance on blockchain

environments. The possible options are to either, A, allow all transfers, B, ban transfers between sanction parties, i.e., declare these transfers illegal and hold violators liable, but otherwise presumptively allow other peer-to-peer transfers, or C, ban all transfers unless specifically allow listed by an institution. Allowing all transfers opens the door to significant financial crimes, and banning all transfers and less allow listed, grinds commerce and innovation to a halt and freezes out the economically disadvantaged. Maintaining a block list is a good balance, prohibiting illegal transfers and freezing funds associated with financial crimes while otherwise allowing commerce. It's worth emphasizing this. All of commerce breaks down if you require an allow

list to transact. Want to buy a bagel at a corner store? Better have your passport, proof of address, phone, email, and social security number ready. Oh, and I sure hope 7-11 likes being a broker dealer. Imagine what would happen to the underbanked if buying a bagel required a passport. Maintaining the presumptive freedom of peer-to-peer transfers in decentralized blockchains, unless there is specific evidence of a scam, illicit finance, etc., is absolutely necessary. At the same time, the largest gap in sanctions compliance right now is timing. What happens if funds from illicit financial activities are moved after the activities are discovered, but before that's communicated to all of the platforms?

What does that mean in practice? To clarify, in practice here means how should things work in a perfect and logical world. One, everyone should respect OFAC's sanctions lists, which, by the way, is already the law. To make this cleaner, A, there should be an on-chain list of the sanctioned addresses updated in real-time maintained either by OFAC or a responsible actor. Treasury should make it clear in public which addresses stores the sanctions list and how to parse it. B, then centralized applications can query in real time the list of sanctioned addresses to avoid transferring funds to or accepting funds from those addresses. C, this list should be transitive. If Alex is sanctioned and

Bob sends $1 million to Alice, then Bob's address should itself be flagged. By utilizing the public blockchain ledger, we can ensure that sanctioned entities can't move their funds to new wallets to deceive the sanctions. However, the reverse is not as simple. We have to make sure that dusting attacks don't harm innocent people. D, there should be a way to cure your address if flagged funds are unilaterally sent to it. D1, if you received funds from a sanctioned address, it might not have been your decision, sending funds as unilateral.

D2, thus there should be a frozen funds address, possibly a burn, possibly maintained by OFAC, that you can send tainted funds to if you receive them, curing your address. D3, your address should not be flagged unless you attempt to forward on the sanctioned assets to other addresses. In other words, sending sanctioned funds is sanctioned, receiving them should come with an opportunity to cure. Two, in addition, trusted actors should maintain their own on-chain list of addresses that are suspected to be associated with financial crimes. There should be a standardized format for this. 2A, to be clear, these are not the same as sanctioned addresses. It's a much lower bar,

and there should not be a legal prohibition on transacting with these addresses. 2B, however, many people may find it useful to reference these lists. 2C, this can also help with inter-exchange cooperation. 3. This will help enforce sanctions compliance and ensure that we as an industry can effectively maintain a block list while still allowing for general economic freedom. Finally, we should attempt to implement some system like the above to help us respond quickly to incidents. If this were updated quickly and immediately on chain, we could make responses and asset freezing effectively instantaneous. Section 2. Hacks and accountability.

Hacks are extremely destructive to the digital asset ecosystem. They've been all too prevalent and large. At the same time, the industry has done a decent job of identifying and flagging addresses carrying funds from a security breach, and so even if the funds are gone, the hacker may not actually be able to utilize most of them. One, we should formalize 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 the associated addresses. Two, whenever there is a security breach, there is often a negotiated between the hacker and the protocol. Often the hacker will offer to return some but not all of the funds

in return for some sort of immunity. 2A, in theory, such a deal can be healthy. It can protect customers, save companies and protocols, and still reward the parties that identified the vulnerability with a generous bug bounty. 2B. But in practice, each negotiation is stressful and contentious for all involved. We understand that as a general matter, the victim is the hacked protocol, and the hacker is not the good actor. 2B1, among other things, the lines between a bug, a hack, market manipulation and trading can blur in many of these cases, with the two sides taking very different views of it. 2B2, also there's no consensus on how much should be returned. 2C. So I propose a new community standard, the 5-5 standard. 2C1. Say that there's a breach,

and Alice takes X dollars from protocol ABC. Say that ABC has Y dollars of their own reserves on hand. 2C2. First, protect customers. Alice should not get anything until customers are made whole, meaning that if X is greater than Y, then at least X minus Y dollars must be returned to ABC. E.G, if Alice takes $1 million and ABC only had 800K of reserves, then Alice has to return at least 200k to make sure that, together with ABC's reserves, customers of ABC are made whole. This is the most important part. Customers must be protected above all else. Second, the only constructive solution here is one in which Alice is working in good faith and fully intends to cooperate and return the bulk of the assets from the beginning. There is no negotiating or holding out and trying to use this framework as a backup plan.

Assuming these two conditions are satisfied, Alice has to return at least 95% of the assets. In particular, Alice is allowed to keep the smaller amount, 5% of X dollars, and 5 million. The rest is returned to ABC. In other words, if Alice takes $1.5 million, she would keep 75K and return $1.425 million. If she takes $150 million, she keeps $5 million and returns $145 million. If Alice follows the 5-5 standard, making customers whole and returning all but the minimum, 5% of the amount she took, $5 million, then the minimum, 5% or $5 million she keeps is treated as a potentially very generous bug bounty. She didn't in fact harm customers. She returned most of what she took

and helped alert ABC, albeit very publicly to a bug. By default, unless there are unusual logistics, Alice has 24 hours to return what she is supposed to according to the 5-5 standard. So to be clear, Alice cannot hold out and then treat 5-5 as a fallback option. It has to be her intention from the beginning to return the assets. If Alice does not follow the 5-5 standard, i.e. she keeps more than her fair share, then she is treated as a bad actor by the community. Note to be absolutely clear that nothing here is a legal or regulatory statement. This is just a proposal for a crypto community norm. The key thing here is, one, create a clear consensus standard to follow so that it's unambiguous what the duty of the bug exploiter is. Two, make sure customers are

protected. And three, make sure there's enough incentive for those who find security holes and protocols to follow the standards that they will in fact do so. Why 5-5? I'm not sure what the right numbers are and am very open to other choices. But if the 5-5 standard had been followed, historically, it would have reduced the impact of hacks by more than 98%. That's a huge improvement and my instinct is that it's well worth accepting the cost of the 2% in return for solving the vast majority of the problem. I think that creating a standard that could drastically reduce the impact of security breaches would be immensely important for the industry. Finally, I feel very uncertain what the right standard to have is and am very open to suggestions on this front.

Section 3, asset listing. Also, what is a security? At least as of now, one central question that actors in the industry must sometimes answer is whether a particular asset is or is not a security. In general, Bitcoin and Ether are not considered securities. Many long-tailed tokens acting as investment contracts are securities. There are a number which are unclear, however. Eventually, there may be a legislative, regulatory, or judicial clarity on this question. Until then, this is how FTX at least plans to proceed. First, our legal team will do an analysis of the asset according to the Howey test, another relevant case law and guidance. If that analysis finds it to be a security, we will treat it as such. If that process does not find it to be a security, we will

generally treat it as a non-security commodity, unless the asset is found by the SEC or an appropriate court of jurisdiction to be a security. If we do find an asset to potentially be a security, we will not list it in the U.S. unless or until there is a process for properly registering it. For all assets listed on our federally regulated platforms, we intend to publish an informal registration statement like overview of the asset. Ideally, 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 securities which protect customers while allowing for innovation. We remain excited to work constructively with regulators to develop and act within a regulatory framework for tokens that are

securities. Want to keep more profits when trading? Get the best possible prices and trade with 50% lower fees on Nexo Pro. The new Spot and Futures trading platform uses aggregated liquidity of over 3,000 order books collected from multiple sources. Utilizing the complete Nexo Suite allows you to earn interest and borrow funds as you wait for the next trade setup. Visit pro.nexo.io. That's P-R-O-N-E-X-O-D-I-O and sign up today. This episode is brought to you by Circle, the sole issuer of USC, and a leader in crypto that's held to a higher standard. USDC is a fast, safe, and efficient way to send money around the globe. USDA is always redeemable one-to-one for U.S. dollars and has over $45 billion in circulation

as of October 13, 2022. Plus, Circle posts weekly reserve reports and monthly attestations of reserve capital, letting users know that USDA is safe, transparent, and compliant with regulations. Just go to circle.com backslash transparency to see why USDC is a trusted stable coin. The breakdown is sponsored by FTXUS. FTXUS is the safe, regulated way to buy and sell Bitcoin and other digital assets, with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees.

one of the largest exchanges in the U.S. FDX U.S. is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTX, you pay no gas fees. Download the FTX app today and use referral code breakdown to support the show. Section 4, tokenized equities. I think that eventually blockchain technology has a lot of potential to improve traditional market infrastructure. On January 28, 2021, retail investors bought large amounts of certain equities, e.g. AMC and GME, on a number of of mobile brokers, notably including Robin Hood. As prices of those stocks rose, the investors made large amounts of money, at least marked to market. But firstly, this posed a problem for the markets. Stocks take two days to settle, and dollars can take months, especially for ACH and credit cards, with some amount of uncertainty and risk that the other side will fail to deliver in the intervening period. This means that, on January 28th, retail investors had billions of dollars in unsettled gains. A typical retail stock transaction goes through a huge number of entities. For instance, 1, Mobile Broker A, 2 A's securities clearings firm, 3A's bank, 4 payment for order flow firm B, 5 B's clearing firm, 6 B's bank, 7 the DTCC, 8 Darkpool C, 9 C's clearing firm, 10 C's bank, 11 DTCC again, 12 payment for order flow firm D, D, 13 DTCC again, 16 Securities Exchange, 17 DTCC once more, 18 and then more for the other side.

That's over 15 entities for a single investment, and every single one of them incurs some amount of settlement risk. So if retail makes billions of dollars in a day, and then you have tens of entities, each of which potentially need billions of dollars of spare capital, in case any one of the many entities in the chain later fails to deliver. Once the investor's profit exceeded the regulatory capital of the less well-capitalized brokers, those traders were shut down and in some cases liquidated to ensure that they didn't make any more money.

Money their brokers would have not been able to guarantee. There's a limit on how much money retail can make in the current equity. market structure. But on January 28th, digital assets kept trading liquidity. Why? Because if Alice wants to buy Seoul from Bob in return for USDC, Alice sends the USDC on-chain to Bob. Bob sends back the sole, and a few seconds later, with just $0.005 in fees, the trade is fully settled, with no outstanding settlement uncertainty or risk, and so essentially no regulatory capital necessary. And if two platforms had a transfer or transaction between them, they could just send the appropriate asset on the blockchain to the other one, once again clearing up settlement risk in seconds.

all of which is to say, I think that tokenizing stocks could help simplify security settlement, providing a stronger and more equitable market structure for retail. What's blocking this now? I think the biggest thing is regulatory clarity. What would clearing custody registration, issuance, disclosures, et cetera, look like for a tokenized Amazon. Five, customer protections, disclosures, and suitability. The clearest way to help protect investors is to provide transparency and prevent scams. Investigators should be given clear, comprehensible information describing the asset they are considering, and regulators should crack down on any that misrepresenter make materially misleading marketing claims. I also think that as a default,

system should not meaningfully run on credit, especially for retail. Retail investors should generally not be able to lose more than they have deposited to a platform, and any credit extended by a platform should be given extreme scrutiny, if its failure could result in socializing losses among other innocent investors on the platform. This is one of the core planks of the clearing model we propose in our DCO amendment. If you have sufficient disclosures and transparency are not exposing investors to more risk than what they deposit, and are regulating away scams, the remaining core piece of consumer production is suitability. In other words, who is an appropriate user for a particular product? There are many ways that one could try to determine suitability,

which generally trade off economic freedom against risk. There is no single perfect procedure to determine suitability. But as a general matter, I believe that knowledge-based tests are the appropriate method, and significantly better for consumers than wealth-based standards. Here are various methods one could use to determine who can access a particular product. A, only investors whose net worth is at least X dollars can access the product. B, only investors whose income is at least Y dollars can access the product. C, there is a test based on the mechanics of the platform and product. Only investors who pass that test can access the product.

D, anyone can access the product so long as the product is not a scam. E, the platform should choose at its own discretion who can access its product. The problem with A and B is twofold. First, they can act to reinforce class barriers. Only the wealthy can get real access to the financial ecosystem. And so only those who already have lots of money are allowed to make and grow money, exacerbating economic, racial, and rural disparities. Second, it's not clear that that, in fact, does a great job of protecting investors. I've found the users who have had to fight

through the most in their life to achieve economic stability tend to be among the most informed, sophisticated, and knowledgeable users. Claiming that excluding the poor from having financial freedom is effective consumer protection would imply things I very much do not believe. The problem with D is that you could see people take an advantage of who do not understand the platform they're using, taking risk they're unaware of and are not willing to take. E could mean any number of things, but is generally an invitation for bias and exclusion, creating ivory towers of financial access. As far as I can tell, C is the most appropriate. Rather than making assumptions around economically disadvantaged populations or condescending to any

particular groups, it drives straight at what is in fact the largest worry, that people will use a product that they do not understand, taking a risk that they are not willing to take. In general, America is built on a foundation of freedom and individual choice, and that's true economically and financially as well as verbally. But that doesn't allow platforms to take advantage of customers with misleading, deceptive, or sloppy products. And so, I support implementing knowledge-based quizzes rather than asset-based ones to determine product suitability. Anyway, in order to demonstrate what we would plan to launch FTX-US derivatives with, were our amendment to be approved, we've put together a site that

contains a comprehensive set of consumer protections, from disclosures to explainers to knowledge-based quizzes. Section 6, Defi. Defi is crucial to a lot of the innovation that digital assets could ultimately bring. It's also one of the trickier things to think about in the context of current regulatory frameworks. But there's never going to be a perfect answer. All we can do is put one foot in front of the other. So here's a proposal for a rough regulatory heuristic to use with Defi. On the one hand, you have actions that feel more like free speech, expression, and mathematical constructs, those that are purely writing code, deploying it to decentralized blockchains, or validating blocks according to the rules of the chain.

Decentralized code as speech. On the other hand, you have constructs that look very much more like centralized financial services, hosting a website that facilitates and enables U.S. retail investors to access DeFi protocols or marketing products. centralized graphical user interfaces and marketing as regulated financial activities. What this would mean? One, you don't need a financial license to upload code to the blockchain so long as it's not otherwise illegal or nefarious. Two, similarly, validators have a core duty to correctly validate blocks, not to judge or police them. Three, however, the following activities would potentially require some license registration, etc. A, hosting a website on EG AWS that provides a U.S. retail

front end for decentralized protocols. B, marketing DFI products to U.S. retail investors. Some examples. You could write the code for a Dex and upload it to a blockchain without a license. You could trade on a Dex without a license so long as you were doing so purely with your own money and not managing a fund. You can send transfers peer to peer without a license, although you would still have to avoid sending it to sanction addresses. Validators themselves purely have the goal of confirming that proposed blocks are in accordance with the rules of the blockchain, not separately parsing and policing regulatory content. If you host a website that makes it easy for U.S. retail to connect to and trade on a Dex, you would likely have to register it as something like a broker-dealer, FCM, etc. You would also potentially have KYC obligations. If you actively market a product to U.S. retail investors, some registration may be required

either from you or the product you are marketing. Dow's with purely on-chain activity do not require licenses similar to individuals. However, a Dow that EG controls a centralized GU or markets to U.S. retail might. It is extremely important that on-chain code and defy remained free and open and uncensored. This is a compromise and is not perfect by any strongly held position. But I think it's reasonable. It allows core technological innovation to continue and people to express their freedom, while requiring licensure for activities that markets to retail or resemble traditional financial brokerages,

creating a layer for regulators to enforce consumer protection and market integrity. I'm very open to suggestions on this front. There are many variants that one could have. But above all else, figuring out how and where defy and things tangentially related to defy do and don't fit into regulatory context is a hard problem, and one on which there is not yet firmly settled thought. We should be careful about locking in decisions absent working out a sound and responsible basis for doing so. Section 7. Stablecoins. Stablecoins represent a huge opportunity to modernize and democratize payments, both domestically and abroad. We should adopt regulatory policy that supports them while protecting against any systemic risk. In short, any stable coin

holding itself out to be stable relative to the U.S. dollar should be backed by at least as many U.S. dollars or federally government issued treasury notes or bills as there are stablecoin tokens in circulation, and should maintain an up-to-date and public information in audits attesting as such. In addition, there should be KYC of the traders participating in the on-ramp and off-ramp process, i.e., kyc of the individuals and entities creating and redeeming the stable coin. This is very easy to get correct, and we think there are a number of suitable regulatory frameworks under which the Stablecoin program may be pursued, provided the operating entity maintains the relevant information on assets and has it enforces the proper KYC requirements.

To be clear, this does not mean that passports and social security numbers are necessary to buy a bagel from 7-11, but issuances and redemptions of StableCoin should be BSA-level KYC'd activity. And that is the end of Sam's thoughts. So as I mentioned, this caused quite, quite a shi storm on Wednesday. The two biggest sources of consternation were one, Sam's thoughts around OFAC, and two, Sam's thoughts around DFI. The OFAC question was for thoughtful critics, one of fundamentals, which is should we be allegiant to the OFAC, to the KYC, to the CTF to the bank secrecy act regime in general. Has it done more harm than good? And do we want to put this new financial structure on top of it? Just like the old one. The second set of questions were

around the specifics of Sam's proposals on Defi and questions of whether or not this proposal amounted to an attempt to kill Defi and make everything go through regulated channels. Now, on Wednesday night, like I said, it was nothing but vitriol. The average angry CT response was some version of FU Sam, or comments about the WEF or veganism or you name it. But since then, however, I have to say I've been fairly encouraged, even in spite of myself, to see how the discussion has evolved. By Thursday, the tone of the discussion has shifted slightly. We got a long response, for example, from Shapeshift founder Eric Voorhees,

who comes from a very different starting political perspective than Sam. He took the time to write a long blog post and engaged in a by and large productive back and forth with Sam. Eric is a person whose starting point is that OFAC is anathema to American values. From his blog post, OFAC is unjust and unethical, and it is anti-American, as defined by the virtues upon which the country is built. For Sam to suggest that the industry should respect OFAC is unbecoming. OFAC does not deserve respect.

It deserves repeal. And anyone genuinely advocating for an open-free economy cannot support such blatant financial discrimination on millions of innocent people. That's a strong, strong statement. But it didn't mean that they couldn't discourse about it productively. Taking it back to Twitter, Eric said, from your original post, it isn't clear where or how you draw the line. I think this is why so many people have been upset about. Everyone should respect OFAC sanctions list. Everyone, every American, are all humans. Should a protocol developer from Japan be blocking all Iranians?

Sam responds, hear you from that, from the post. Similarly, validators have a core duty to correctly validate blocks, not to judge or police them. Validators themselves purely have the goal of confirming the proposed blocks, not separately parsing or policing regulatory content. Eric responds, that's well said, but then, why should a validator just process the data? But a front-end dev should be making AML judgments. This is the fundamental incongruity of your post and the most important to address. Sam responds, I think that making the distinction between US-based front-ends versus validators and smart contracts is the compromise to make practically. It preserves the core freedom while accepting that things that look like BDs will register

as such. But one could try a different line instead. So here we have an exchange that gets to a fundamental point and actually, identifies, Sam saying this is his best bet for where the compromise, where a political compromise line should be drawn. But the debate around where to draw compromise lines is exactly the one to be having now. Another example of the discussion getting better over the last couple days is Scoopy Trooples, a founder of Alchemics who has been widely quoted with not so nice commentary about Sam and his proposal. They offered the Twitter equivalent of a discussion, Olive Branch. They tweeted,

Yeah, I'm not happy with SBS proposal. It's no secret. Yes, I went off on his practices that I think are injurious to the space. But I hope he listens to the outcry and reconsider his proposal. If he can prove he's actually advocating for crypto and defy's interests and not just his, I'm more than willing to bury the hatchet. Now, I'm not sure that Scoopy and Sam have fully found common ground. But by Friday, instead of the discourse being about Sam's connections to Bill Clinton because he spoke at an event that FTX held, it's instead Scoopy laying out their points. They write, I vehemently disagree that a frontend makes something a centralized finance app. The entire backend is on chain and it's merely an interface that's more convenient to use than EtherScan.

This gets it directly the same conversation that was being had with Eric Voorhees, where the compromise line is. Scoopy also deals with OFAC. As far as OFAC goes, there needs to be due process and a resolution to the tornado cash situation. People are getting dusted and added to the list and how many degrees of separation would it track. 90% of users are four degrees of separation from tornado cash, whether they used it or not. My political stance is for anti-censorship, which may not be feasible but for many defy daps, they literally wouldn't be able to comply with blacklisting requirements because they didn't add their functionality to the immutable contracts. What happens to them? So the point here is that over the last couple of days, a huge part of crypto Twitter has moved from hurling memes at one another

to substantive discourse around the incredibly challenging issues of where compromise should and shouldn't be, as relates to the regulatory regime for an entirely new political, technological, and social phenomenon. I think that's huge progress. I think it makes crypto better, and I think it increases the likelihood of better regulation on the other side. And as I said up front, my goal in reading this was not to convince anyone of anything. In fact, I think it's quite important that the crypto industry has a political compromise wing and a much more ideological argue from first principles wing. I think that there are two conversations happening simultaneously. One is a professional business thing. How should companies and actors in this space be regulated given the existing

regulatory regimes? The other is more of a rights conversation. How do the new opportunities of this technology intersect with what we know about people's rights as enshrined in U.S. law? They overlap but are different and need different voices advocating from either side. So all in all, in spite of myself, I like where this conversation is headed. And hopefully if you've made it this far, no matter what you agree with or disagree with, feel like you have a stronger basis to argue whatever points are important to you from as well. For now, I want to say thanks again to my sponsors, nexus.com, circle and FTX. And thanks to you guys for listening.

Until tomorrow, be safe and take care of each other. Peace.