The cryptocurrency sector is at a crossroad, one which rests on the fundamental reason for the industry’s existence. The recent debate between FTX’s Sam Bankman Fried and staunch libertarian and crypto OG Erik Voorhees highlights the perfectly straight line that separates cryptocurrency from pro-censorship legacy finance.
The multi-billionaire Sam Bankman-Fried (SBF) stirred controversy recently when he talked about implementing blocklists for crypto addresses, potentially placing the onus on front-end applications to enforce this censorship. He argued for regulation that would oblige companies to ban addresses that are suspected of being used for nefarious purposes. SBF also argued that the US Office of Foreign Assets Control’s (OFAC) sanctions lists should be respected by keeping “an on-chain list of the sanctioned addresses … maintained by either OFAC or by a responsible actor.”
The issue is that ban lists are deeply unethical as they tend to have lots of collateral damage, which is unacceptable in an industry which defines itself by the fact that it is censorship resistant. As Erik pointed out, US citizens cannot send money to any Iranian due to a blanket OFAC ban, even if it’s an Iranian woman fighting for basic dignity and human rights. Many such examples exist, which puts Sam’s call to ‘respect OFAC’ on shaky ground.
Another issue with Sam’s (admittedly highly transparent) proposal is the idea to regulate DeFi at the level of graphical user-interfaces (GUI). The issue is that by obliging front-end developers – who are key to mass market adoption – to enforce unethical mass surveillance policies, you are effectively removing the entire point cryptocurrencies were created in the first place.
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DeFi regulatory mission creep
Speaking about the recently updated US DCCPA bill and the crypto regulatory approach more broadly, Erik Voorhees said:
Whatever the appropriate regulations are for DeFi, this bill is not where they should be contemplated. We are not ready, and thus the DCCPA should not include any conception of DeFi, because if it does it’s going off track.
If the target moves from intermediaries to normal unregulated non-financial businesses, operators of websites, people who are interacting with DeFi, then that is a line that should not be crossed at this juncture.
In another segment about DeFi regulation, Voorhees argued that the cryptocurrency sector is defined by its fundamental differences to traditional finance, and that influencers in the space should not work to recreate another exclusionary financial system like the one that currently exists.
The entire point is open, permissionless, finance. And when we say that it is not just a slogan – it is the entire point. If you exclude 99% of people from open permissionless finance, then all you’ve done is make a more complicated and more expensive traditional financial system. That’s not acceptable to me and to most of the people that care about why we’re doing this in the first place.
Voorhees drew parallels to the beginnings of the Web, arguing that if any part of the web stack (LAMP) required a license then the internet would not be as it is today. That is, if people needed permission to access certain parts of the internet – to read, write create a website or business – then the explosion of growth, wealth and information-sharing would not have happened.
In other words, the same battles and debates taking place in crypto were had in the 90s when the internet began gaining traction.
It would be the height of irony if crypto entrepreneurs then gave up that very same argument 25-years later, and allowed finance itself – which is no more dangerous than information – to become a permissioned system.
Irreconcilable differences
In the back-and-forth discussion, SBF unwittingly revealed the cognitive dissonance that emerges when once tries to reconcile overbearing regulatory oversight with crypto first principles. And indeed, the correct characterisation for the Bitcoin and cryptocurrency sector is ‘censorship resistance’, and despite his best efforts, SBF – one of the smartest people in the industry – could not reconcile the two opposing points without unacceptable trade-offs.
In closing, Voorhees highlighted that crypto and broader finance are in a history-defining moment comparable to when Church and state were separated.
We have created a new financial foundation for the whole world. This is a huge responsibility. The entire purpose of this financial foundation is that all of humanity can use an open immutable financial layer. We are separating money from politics. We are separating money from the state. And the same way that the Church was separated from the state and everyone now hails that as one of the greatest things humanity ever did, we now too – it comes to us – to do the same thing for money.Money is as or more important to people than religion is. We interact with it every day, in all sorts of matters. And just as mathematics and language are open to the entire human race, so too should the exchange and management of money. That is the principle that makes our entire ecosystem important. That is the principle that justifies everything that we do. And if we lose that, it will be something that we regret for the rest of our lives because we had that opportunity.
We can’t protect that principle when it comes to centralised custodians – granted. But we can protect that principle when it comes to decentralised immutable finance, which we call DeFi. That line exists to the degree that we all defend it.
Privacy considerations are mission critical
Besides censorship resistance, there are also privacy considerations which transparent networks such as Litecoin and Monero tackle head on. During the mandate protest in February 2022, the Canadian government froze funds and suspended bank accounts of protestors who demonstrated wrong-think. The events that occurred showed that so-called Western governments are willing to compromise decades of human rights progress when the political climate turns sour. This highlights the need for censorship-resistant, privacy-preserving tools for ordinary individuals looking for an exit.
Besides being a basic human right supposedly guaranteed by developed, civilised nations, privacy is an essential tool against political persecution. The bitcoin network is censorship resistant. But this isn’t enough, as rogue governments can easily trace transactions and view wallet holdings. The Litecoin network is both censorship resistant and privacy-preserving.
By implementing privacy considerations at the protocol layer, Litecoin has fully recreated physical cash properties in cyberspace.
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