Sam Bankman-Fried, the billionaire CEO of international crypto-exchange FTX dropped some thoughts on how regulation could be approached for crypto on October 19th.
His thoughts on how to manage sanctions in particular were powerful and would pave the way for any blockchain or crypto company to adopt them with ease.
While clear in his communication that his proposal was only a draft, and not to be confused as law or legal advice. The largest takeaway on sanctions called for the Office of Foreign Assets Control (OFAC) to maintain a list of sanctioned addresses on-chain.
What does this mean?
To hold crypto currency such as bitcoin or ethereum somewhere, a wallet is needed. Wallets are applications that allow for your ownership of a particular “account” on a blockchain to be verified. This means you can access whatever is held by that account and send/transfer it.
Receiving any asset to the wallet can happen without your consent however, all actions depend on the sender, and in order to send to an account you only need to know that accounts “public key” commonly referred to as an “address.”
Addresses are unique for each wallet on a blockchain and serve as a combination of location and username. To create a wallet on a blockchain you could use a popular one such as Metamask for ethereum, or if you are a tech savvy hacker, just tap right into the proverbial matrix and make one on your own.
In this second case, you would be able to bypass any company or product. The wallet would be made by you, on a decentralized chain, and known about only by you.
In such a system how could anything ever be truly regulated?
One awesome advantage of blockchains is the ability to track the movement of funds.
Let’s say that a popular site that accepts bitcoin is hacked or its security compromised in some way. We know that a specific bitcoin was stolen as part of that security breach. Because blockchains are public we can then see all the wallet addresses that that bitcoin was moved to.
We may never know who created the wallet with a specific address, but we know that it’s suspicious because it has bitcoin in it from a “heist.”
In his considerations for how to regulate this, Bankman-Fried reminds us that you don’t need to consent to receiving crypto into a wallet. So if someone is truly nefarious, they could steal funds and then send fractions of the bitcoin to millions of users making them all look suspect.
Because of this, there is no recommendation to actually freeze or sanction receiving accounts in whole/forever but instead only their suspicious funds.
The most interesting part of the proposal comes from how to actually maintain and track the addresses of sanctioned accounts.
If OFAC has a list of all addresses that are sanctioned, Bankman-Fried points out that we can assume any address sending assets into that sanctioned wallet should also be sanctioned.
He proposed a list of all of these addresses to be stored on-chain. This would entail OFAC creating some form of blockchain software that publishes a list of all wallets that are not-to-be-interacted-with into data that lives permanently on the blockchain. While not mentioned in his letter, it would make the most sense for these to live in a separate list for each blockchain that exists on said blockchain.
With a publicly available list that’s entire history is guaranteed accurate and uneditable, any private company, public institution or individual could access that list and ensure that they are adhering to the most recent sanctions. If done with code, it would be a one time ordeal to integrate the check, and you would always be able to trust that the list, maintained by OFAC was up to date.
While the proposal goes into many other recommendations, getting a government agency involved in storing data like sanctioned wallet addresses on a blockchain stood out as a particularly big deal. This would be more than a law, or a published paper, but an active commitment towards using blockchain technology as a core part of our financial regulation landscape.