Sam Bankman-Fried Pitches ‘Sanctions, Allowlists and Blacklists’ in Crypto

FTX boss Sam-Bankman Fried thoroughly broke down his ideal regulatory framework for the crypto industry on Wednesday.

The billionaire said he is a proponent of regulation using blacklists or blocklists, a model where individuals may freely trade unless explicitly sanctioned. This is in contrast with whitelists or allowlists where individuals are banned from trade by default unless explicitly granted permission. 

“We need fast, reliable lists of addresses associated with illicit finance,” said the CEO. “But peer-to-peer transfers should generally be free as long as they’re not going to sanctioned actors.”

In a more detailed document on FTX’s website titled “Possible Digital Asset Industry Standards,” the exchange—likely channeling its top executive—further argued that using allowlists would be a massive burden on innovation and commerce that “freezes out the economically disadvantaged.” On the other hand, the exchange noted, simply allowing all transfers would open the floodgates to financial crime.

Blocklists, it argues, strike a much healthier balance between the two.

“This can simultaneously enforce sanctions compliance effectively while also making sure that you don’t need a passport and social security number to buy a bagel from 7-11,” said SBF.

Enforcing such sanctions compliance can be difficult in practice, however. FTX raised the issue of timing. “What happens if funds from illicit financial activities are moved after the activities are discovered but before that’s communicated to all of the platforms?” the service asked.

When it comes to the blockchain, crypto addresses do not equal users. Stolen funds can be transferred through a virtually infinite number of addresses, with little way of knowing to who each address belongs. That leaves exchanges with the tough task of constantly monitoring which addresses are associated with illegal funds and blacklisting them accordingly. 

Even that creates its own set of problems. In August, a Twitter troll dusted hundreds of high-profile addresses with tiny amounts of “tainted” Tornado Cash ETH, shortly after the privacy protocol was sanctioned by OFAC, creating a legal mess for the unwitting recipients. 

FTX suggested that OFAC create an address specifically for any dusting victims to send their illegal funds to, thus “curing” their address from blocklist status. 

The exchange also recommended that “trusted actors” maintain their own lists of addresses suspected of being related to financial crime, but which are still legal to transact with. 

“In other words: sending sanctioned funds is sanctioned; receiving them should come with an opportunity to cure,” it concluded.