Sophistry and the Savior
“The safe, regulated way to buy and sell Bitcoin and other digital assets.”
This has been the catchphrase underpinning FTX’s advertising campaigns for months.
FTX had become a poster child of the “responsible” and “compliant.” FTX operated within the laws, it was “safe and regulated.”
Its leader, Sam (SBF), was given the opportunity to speak with Congress and various regulators on responsible crypto legislation. He played ball with DC, and was the second largest donor to the Democratic Party, behind George Soros.
FTX put its name on the Miami Heat stadium, and cozied up with Tom Brady and Gisele. A wholesome, compliant American exchange trusted by politicians and celebrities. Check this clip out.
Welcomed eagerly by the establishment, SBF continued to be involved in shaping upcoming crypto legislation, and as noted by CoinDesk, “[SBF] was a vocal proponent of the DCCPA bill that would create a brokerage-like licensing system for decentralized finance and argued against financial privacy.”
The Safe, Regulated CEO
Only a few weeks go, SBF conveyed some of his regulatory suggestions to the community. I responded the next day, and this sparked a conflagration within the community.
A week later, we were both invited on the Bankless podcast to debate this very topic in depth: to what degree is crypto regulation appropriate, and specifically how should defi be treated (and should it be treated at all) in the context of the DCCPA?
That debate received an overwhelming response from the community, which (rightly) was concerned that Sam was inviting licensing restrictions to be born down on defi, so long as it enabled the DCCPA to pass this year in the manner he wished (a goal for which, presumably, he’s been donating towards). Sacrificing defi (or at least the web front-ends, which is how everyone uses defi) was “worth the cost” he said, to get a good bill done.
Pretty impressive that 221 regulators tuned in!
While the public overwhelmingly resonated with the message of freedom and a defense of that formerly core tenet of Western law, the presumption of innocence, naturally those supportive of tradfi and the US regulatory structure were eager to dismiss my points as “idealistic” or “unrealistic;” the immature rantings of an extremist libertarian viewpoint which has no place in proper society.
“Of course the Federal Government ought to surveil and centrally control our financial markets. 1st Amendment be damned. 4th Amendment be damned. Statue of Liberty and the entire founding ethos of America be damned. More regulation (or “clarity,” as we euphemize it) is always appropriate.” -Patriotic Architects of the Status Quo
SBF was the pragmatist who towed that line and “knew how to get things done in Washington.” Getting frustrated by the community’s belligerent response to his suggestions (aka their adherence to moral principle), he passive-aggressively taunted those who—unlike him—weren’t actually in DC having productive bribes conversations with regulators.
Then, on Nov 9 all hell breaks loose because the “safe, regulated way to buy and sell Bitcoin and other digital assets” was apparently insolvent to the tune of billions of dollars. Funds were not safu.
But how can a spot exchange be “insolvent?” Don’t they just take in user deposits, let those users trade, and if all users want to withdraw, they do so? No problem. It’s not like FTX was operating as a fractional reserve bank.
Except that they were… a new financial intermediary mirroring the old, just without any taxpayer backstops.
This safe, regulated exchange seems to have lent out billions of dollars in customer deposits to its sister company, Alameda Research (the other arm of SBF’s former empire). Alameda went bust on speculative bets, couldn’t pay back the money, and the house of cards fell apart after Binance announced it was selling its pile of FTT token (which comprised a large portion of the FTX balance sheet).
If it sounds too familiar, this is similar to what nuked that other safe, regulated custodian, Celsius, earlier this year (what a year!). Celsius was loaning/leveraging customer deposits for its own gains. And in both cases, this was not being disclosed to the users of these platforms. Billions lost, but hey, at least they were doing KYC so they have the ID’s and home addresses of everyone they fucked.
The sparkling shimmer of regulation is much like that little light on the end of the angler fish, alluring not just to hapless victims who can’t think for themselves and so look to politicians thousands of miles away for protection, but just as alluring to those politicians, for in its glow they see themselves as saviors.
Alas, my view is just that of a radical minority. Surely others reading this think, “This is actually an obvious case of not-enough-regulation, ser. Let’s get a new bill together and solve this with the fine scalpel of Federal oversight. A committee shall be formed, or better yet, several committees. Hearings shall be heard! America will demonstrate its leadership with a resolute commitment to consumer protection.”
I can see the lawmakers salivating over more lawmaking. I can imagine the appropriate title of the pending 400-page diktat that emerges: “The Freedom Bill for Responsible American Financial Oversight and Also for Less Inflation.” The bi-partisan TFBRAFOALI Bill.
Only an anarchist that doesn’t care about people, and probably isn’t even vaxed, would oppose such proactive legislation.
A Humble Plea to Washington in the wake of FTX
If any regulators end up reading this piece…
Remember in 2008 when your system went down the shitter and hundreds of billions of dollars had to be taken from taxpayers (honestly through taxes or dishonestly through inflation) to bail out the heavily regulated financial institutions that nearly brought down the world economy and sent tens of millions into poverty and despair?
Well, the builders of the crypto industry, without a dollar of tax money, built an alternative. This started with Bitcoin as a neutral, honest, base money that anyone could use and access according to transparent rules. It expanded with Ethereum and smart contracts, such that all manner of decentralized financial tooling could be built.
This suite of technologies is called “decentralized finance,” or “defi,” and it has, in fact, already solved the problem of trust in financial markets. Read that sentence again and rejoice.
Isn’t that wonderful? With defi, financial transactions are transparent, not just to government regulators, but transparent for the entire public to see and learn from (or is that not good when the public can know things, too?).
With defi, accounts are transparent. Transfers are transparent. Trades and even complex financial derivatives are transparent. Balances are proven cryptographically. The code that executes these transactions is open-source, anyone can review it or suggest changes! You can look it all up for free on Etherscan, you don’t even need a $20k Bloomberg account. The code works exactly as written, and no human subjectivity need concern its execution. Incredibly, it’s all borderless, such that every man, woman, and child on Earth has equal access and opportunity to interact with global financial markets.
How beautiful is that? Where’s Satoshi’s Nobel Prize? …oh it went to Bernanke?
The opaque fraud that just happened with the highly regulated FTX would not (can not!) happen in defi.
The re-hypothecation through which the highly regulated Celsius betrayed their users and lost millions, would not (can not!) happen in defi.
The complex derivatives and custody issues which froze financial flows in 2008, back when safe, regulated financial institutions had no idea who owned what and markets collapsed under the layers of counterparty risk… these would not (can not!) happen in defi.
And yet what have many regulators done in response to this suite of miraculous technology that was built by brilliant, determined, principled engineers over the past decade? Have they even learned how to use it? How many of those drafting crypto laws have ever actually executed a defi loan?
Regulators - open, immutable, inclusive, honest finance is sitting at your doorstep, merely wanting to exist without persecution, and you forsake this Promethean Fire at every opportunity, or pretend to embrace it while knifing every attribute that makes it special.
Consider that the only transparency we have on FTX at the moment ironically comes from blockchain forensics through its use of defi, not from any of you.
The false veneer of regulatory sophistry having yet again failed them, the victims of SBF must now seek resolution through law.
But what will never be resolved through law is that when finance is based on the subjective behaviors of men, it will be prone to the failures of men. It does not matter how many laws are written. It does not matter who writes them.
Defi is finance based not on the subjective behaviors of men, but on the immutable law of code. It is powerful and important, and if you care about protecting consumers, it is the greatest set of advancements toward that end in all of human history. Against the innumerate flaws of man, this is an actual savior.
If you feel the need to regulate centralized custodians like FTX, I get it. Remember, though, that you’ve already regulated them with a hundred prior laws. Maybe reflect on that.
But if you feel the need to regulate defi—decentralized finance—pause for a moment, and with humility recognize that you and your staff may not yet understand it, and consider that your law may merely suffocate a grand and ready solution to so many of the problems you rightly see around you.
If you impose the licensing apparatus that has governed traditional, fiat-based finance, you will at best be ineffective, and at worst will subordinate billions of people to gradual impoverishment and continual financial shade and trickery.
Yes, defi removes some of your power as regulators… but it solves the problems you’ve been trying to regulate. Isn’t that more important?
