Sam Bankman-Fried proposes standard for sanctions and licensing for DeFi protocols.

FTX CEO Sam Bankman-Fried (SBF) said while the crypto industry needs to remain an open economy where peer-to-peer transfers and codes are free, regulatory oversight is crucial for sustainable innovation.

SBF published his thoughts on possible standards to help the crypto industry thrive while waiting for more established frameworks by U.S. regulators.

1) As promised:

My current thoughts on crypto regulation.https://t.co/O2nG1VrW1l

— SBF (@SBF_FTX) October 19, 2022

Implementing blocklist and sanctions

To check against illicit financing, SBF proposed that the industry adopts blocklist and not allowlist models.

With blocklists, all individuals can trade freely unless sanctioned for bad behavior, whereas in allowlists, the transaction door is only opened to a select few.

SBF argued that a blocklist model is more effective as it allows for transactions to flow seamlessly while prohibiting illegal transfers when detected.

If a user’s address is unlawfully sanctioned, SBF suggests that the OFAC should provide an option to cure the address.

To cure an address, the user simply transfers the sanctioned assets to an authorized address for possibly burning or freezing. Failure to return the illicit funds will subject the user to sanction laws.

On hacks and consumer protection

Following the high incidence of hacks in the crypto space, SBF proposes that negotiations with hackers will be more efficient with a 5-5 standard.

In this new standard, the first point of call for hacks will be to make the consumers whole.

Secondly, the hacker should commit to returning 95% of the stolen funds. The withheld 5% will be considered a generous bounty which may encourage more white hat hackers to be incentivized to protect the industry.

On protecting customers, SBF suggests that retail investors should be given clear and comprehensive information on the asset they are considering.

To determine users’ suitability to use an investment product, platforms could opt for a test-based mechanism where only those who pass the test can access the product.

Licensing for DeFi protocols

SBF said that while protocols don’t need a financial license to deploy codes or for validators to confirm blocks, actions like marketing DeFi products to U.S. retail investors and hosting websites for DeFi protocols may need some level of licensing and KYC obligations.

SBF added:

“If you host a website that makes it easy for US retail to connect to and trade on a DEX, you would likely have to register as something like a broker-dealer.”

SBF admitted that DeFi protocols opting to obtain an operating license is a compromise that may be needed for crypto innovation to continue.