FTX CEO Sam Bankman-Fried (SBF) posted a draft of a set of standards to create clarity and protect customers as the US awaits full federal regulatory regimes.

While highlighting the significance of regulatory oversight and customer protection, SBF said there needs to be an open economy where peer-to-peer transfers, code, validators, etc., are presumptively free. He believes establishing standards is necessary until regulation hit the scene to help inform and protect customers.

SBF’s Guidelines

The draft deems “blocklists” as the correct approach to sanctions compliance on blockchain environments. While enabling all transfers could potentially facilitate significant financial crimes, SBF believes maintaining a blocklist containing illicit addresses is a good balance in preventing such crimes. Otherwise, they could allow peer-to-peer commerce, provided they don’t engage with sanctioned entities.

OFAC or a responsible actor should also keep a real-time updated on-chain list of sanctioned addresses to ensure crypto entities avoid transferring funds to or accepting funds from them. Additionally, SBF suggested the need to cure the recipient address if flagged funds from sanctioned addresses are unilaterally sent to it. Meanwhile, trusted actors in the digital asset ecosystem should have their on-chain list of addresses that are suspected to be associated with financial crime.

To reduce the impact of hacks, SBF stated that major trusted parties should add addresses associated with security breaches to their public list of “suspicious addresses” to enable centralized and decentralized protocols to promptly freeze associated ones.

A negotiation between the hacker and the affected protocol takes place during certain security breaches. While SBF said a deal that involves offering a generous bug bounty to the hacker for identifying the vulnerability in the protocol does not sound bad, he argued that such negotiation is often “stressful and contentious” in practice. He proposed a new community standard – “the 5-5 standard” – to protect the customer funds above everything else.

For the FTX CEO, decentralized finance (DeFi) has been the “trickiest” area to get right. He proposed a rough regulatory heuristic to use with the space that involves no oversight for uploading code to the blockchain.

The validators’ core duty is to correctly validate blocks and “not to judge or police them.” But the requirement of license and registration comes into the picture whole hosting a website that provides a US retail front-end for decentralized protocols as well as marketing DeFi products to retail investors in the country.

Weighing in on the complex nature of the space, SBF said,

“figuring out how and where DeFi and things tangentially related to DeFi do and don’t fit into regulatory contexts is a hard problem, and one on which there is not yet firmly settled thought.”

Until there is an explicit regulatory framework, Bankman-Fried underscored the need for “up-to-date public information and audits to confirm that dollar-backed stablecoins are, in fact, backed by the dollar.” He suggested the KYC of the traders participating in the on-ramp/off-ramp process.

Community Feedback

The premise of the sanctions section by the crypto billionaire was not welcomed by many. Some contended that the sanctions set up in the guidelines “removes the entire value of Web3.” Another user argued that the proposed draft would steer the space, which was meant to bring financial revolution, into an already existing financial system.

Bankless founder Ryan Sean Adams believes the draft that states – DeFi should be “OFACed,” on-chain freezing should be normalized, and DeFi’s front-ends requirement to register as a broker-dealer – is not reasonable and would end up eliminating the US from the crypto race. He further went on to say,

“The solution isn’t to apply the old CeFi rules to DeFi. The regulation should approach DeFi from first principles.”