As the cryptoverse debated a U.S. bill Wednesday that would “kill DeFi,” crypto mogul Sam Bankman-Fried floated a set of self-imposed industry standards to “create clarity and protect customers.”
DeFi purists were not amused at the twin barrelled threats.
Gabriel Shapiro, general counsel at Delphi Labs, leaked a draft of the Digital Commodities Consumer Protection Act of 2022, or DCCPA.
A Ban on DeFi
The DCCPA would designate the Commodity Futures Trading Commission to police the spot crypto market, a move many favor, as the CFTC is perceived to be a more lenient enforcer than the U.S. 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 in September of an earlier version of the legislation.
In a blog post, Bankman-Fried, the head of centralized crypto exchange FTX, suggested building regulatory compliance into DeFi protocols themselves. Such a move, which is common in self-regulatory market organizations such as Finra, the Financial Industry Regulatory Authority, can be costly and painstaking processes that take years to implement.
More poignantly, such a regime is bound to offend DeFi supporters who shun the idea of centralized oversight.
Several prominent crypto-focused accounts on Twitter speculated that Bankman-Fried is secretly lobbying for the bill’s passage.
“FTX is spending money to push a law thru congress that may force defi protocols to operate like centralized exchanges,” scott, the mononymous founder of DeFi Pulse, tweeted. “The proposal is called the Digital Commodities Consumer Protection Act. a better name would be the Digital Commodities FTX Protection Act.”
Coupled with his self-regulatory stance, the rumors have turned Bankman-Fried into an object of scorn in web3.
Zero Regard for Development
“SBF is blatantly trying to kill DeFi and decentralization in general,” zefram, of NFT marketplace Sudoswap, tweeted. “SBF, FTX, and Alameda have repeatedly demonstrated that their sole purpose is to extract as much value as possible out of crypto with zero regard for its development.”
Bankman-Fried conceded that his suggestions were only meant to jumpstart discussion, and may have been poorly worded.
“Keeping DeFi and peer to peer transfers free is crucial. There are policies I honestly think are key to achieving that. I could be wrong about those policies–I probably am wrong about some!” he wrote. “allowing for the *ability* for DeFi to ultimately interface with regulated entities, when phrased poorly, could be read to imply a need to. And to be clear I don’t think it should need to.”
A representative of FTX did not respond immediately to a request for comment.
Nevertheless, lawmakers must “understand how strong the opposition to the last published draft of the DCCPA has been within the DeFi community, and why,” Chervinsky wrote on Twitter Wednesday.
That draft bill states that trading facilities “shall provide a centralized market for executing transactions,” Chervinsky noted. “What does that mean for DeFi protocols? Wallets? Apps? Users? Unclear.”
The bill defined “digital commodity dealer” as “a person that makes a market in a digital commodity.”
“Does that mean every liquidity provider in an AMM DEX protocol has to register with the CFTC? That just can’t be,” Chervinsky wrote.
It was unclear how much of this language had changed in the version of the bill leaked by Shapiro. But several crypto organizations came out in opposition over 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 doesn’t specifically mention DeFi,” Alliance wrote in a widely-cited Twitter thread.
But it 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 in fact, require—human activity at the center of the project, effectively banning decentralization and therefore DeFi,” Alliance wrote. “For example, the bill would require that every [decentralized exchange] have emergency powers that provide for the authority to liquidate or transfer positions as well as to suspend trading in a particular digital commodity ‘in consultation or cooperation with’ the CFTC.”
Alliance continued: “The bill creates a compliance architecture that precludes the concept of a system of smart contracts operating decentralized infrastructure with little or no reliance on human activity.”
Alliance warned the bill could be passed as part of an end-of-year omnibus legislation.
As for Bank-Fried’s blog post, he positioned it as an “industry norms manual,” or set of standards governing best practices. It is a time-honored approach in traditional finance but is alien to the grassroots ethos of DeFi.
“Ideally, some industry group would mull over these topics, revise them, and publish what they feel to be an appropriate set of community norms!” he wrote.
Perhaps most controversially, the blog calls for “Blocklists” that would prohibit transfers and freeze funds associated with financial crimes.
“There should be an on-chain list of the sanctioned addresses, updated in real time, maintained either by OFAC or by a responsible actor,” Bankman-Fried wrote, referring to the US regulatory agency that placed privacy protocol Tornado Cash on a list of sanctioned entities in August. “Then, both centralized and decentralized applications can query, in real time, the list of sanctioned addresses, to avoid transferring funds to or accepting funds from those addresses.”
Such a list should be transitive so that anyone interacting with sanctioned wallets gets added to the list. This would prevent sanctioned entities from avoiding the sanctions by generating and sending crypto assets to a brand new wallet.
“There should also be a way to cure your address if flagged funds are unilaterally sent to it,” Bankman-Fried added, anticipating a drawback to the proposal. “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.”
Tokenization of Equities
Bankman-Fried recommended licensing for entities that create and maintain websites that allow users to access DeFi protocols and that market DeFi products to retail investors.
He also suggested industry standards for addressing hacks, the listing of assets on exchanges, tokenization of equities, disclosure and stablecoins.
The suggestions were poorly received within the crypto community.
“Sam. With respect. This absolutely sucks,” Ryan Sean Adams, of the Bankless podcast, wrote. “This would eliminate the U.S. from the crypto race.”
Others were less generous.
“Sam is a man who built his fortune running a gd 100x leverage perpswap exchange that didnt do KYC and marketed itself to retail noobs through a hyper aggro affiliate marketing campaign,” scott, the co-founder of DeFi Pulse, tweeted. “Now he wants you to believe that he is killing defi to protect those same people. Yea right.”
Shapiro, the general council at Delphi Labs, suggested an alternative set of crypto-friendly regulations.
“For DeFi there should be a detailed notice & disclosure regime–no permissioning/gating by regulators, no you can launch only if you follow ‘principles’, etc,” he wrote. “Just disclose all material facts, file publicly, keep up to date, be liable for fraud if wrong.”