• L Misthos and S Pettigrove

Debate heats up over digital assets industry standards



CEO and co-founder of FTX, Sam Bankman-Fried, has released a draft set of possible digital asset industry standards that could be enacted to encourage clarity and consumer protection pending a full federal US regulatory regime (the Proposal). Despite positive progress in recent months, the proposed standards are an attempt to offer suggestions and open a dialogue about regulation and establish a consensus around industry norms.


The Proposal covers hacks and accountability, asset listings, tokenised equities, consumer protection, sanctions compliance, DeFi, and stablecoins. It begins by considering ways to nullify the impact of hacks which have been a prominent issue in recent months. The Proposal suggests a '5-5 Standard' as a consensus negotiation standard between an aggrieved protocol and hacker where a hack occurs. The standard would require the hacker to return as much money as is required to ensure the protocol's reserves are enough to make customers whole, while keeping 5% or $5million (whichever is lower) as a bug bounty.


Next, and perhaps unsurprisingly, the Proposal discusses what digital assets can and cannot be listed on exchanges. According to the Proposal, FTX's legal team will do an analysis of assets using the Howey Test and other relevant case law and guidance. If the asset is deemed to be a security it will be treated as such. If the asset is not found to be a security, FTX will generally treat it as a non-security commodity, unless alternate direction is received from the SEC or a competent Court. Mr Bankman-Fried hopes that eventually registering digital asset securities can be done in a way that protects consumers and allows for innovation.


The Proposal also focuses on consumer protection and encourages a crack down on assets that misrepresent or make misleading claims to consumers. Mr Bankman-Fried also proposes that, as a default, systems should not meaningfully run on credit, especially for retail. This is because retail investors should not be able to lose more than they have deposited to a platform, and as such, any credit given by platforms should be scrutinized if it could result in socialising losses among other innocent investors on the platform.


The Proposal's suggestions on sanctions compliance and DeFi, which include a proposal that DeFi front-ends may be licensed and incorporate sanctions screening, elicited controversy among some DeFi supporters.


The Proposal is a useful contribution to the regulatory debate over digital assets and has served in provoking discussion about regulatory standards for the industry. A number of prominent crypto personalities have weighed in with their views on the proposals including ShapeShift founder, Erik Voorhees, who agreed to a live online debate with Mr Bankman-Fried over the merits of the proposed standards. We anticipate that this debate will continue to rage for some time to come.