SBF & the regulatory state
Sometimes a reasonable guy is as dangerous as an unreasonable one
Sometimes a villain hides behind the facade of reasonableness.
I hadn’t really been paying much attention to the various regulatory proposals going around crypto world and Washington, DC over the past several months. And, when I saw Sam Bankman-Fried’s articulate and apparently reasonable approach to regulation, I thought: this makes sense. He’s basically saying: regulation is inevitable, and you might as well have a seat at the table.
We of course now know that he was really arguing for regulation that would have favored FTX and other centralized exchanges, at the expense of decentralized platforms, AKA DeFi.
Before I continue further here, in the interest of transparency, a few weeks ago I defended Sam Bankman-Fried’s regulatory proposals. In fact, there’s a whole blog post on my old Ghost blog. I don’t know how long my Ghost blog will remain active, so I will briefly review the post here.
On October 19th, 2022, SBF tweeted his views on regulation:
I responded:
With the benefit of hindsight, my tweet looks terribly stupid. Here’s the thing: I hadn’t been paying close attention to the regulatory debates going on. I saw SBF’s articulate, relatively even-handed approach, and thought “he must be on to something.” And so I agreed with what he had to say.
Oh well. Mea culpa and all that.
That background out of the way, I want to highlight two interesting pieces which came out Friday, November 11th, 2022. I want to highlight them because I think that a lot of people want the regulatory state to protect them and other users from themselves. Be careful with what you wish for, etc.
The beliefs we sign on to are separated from hallucinations by the thin veil of reality. Since the veil is so often translucent and unreadable we act as if the veil doesn’t exist, but it does, and we all too often skip back and forth between the two places.
There is a whole lot you can accomplish if you’re brazen enough. This feels like an unspoken strategy. If you’re a startup, VCs will give you money because doing very deep due diligence is not their business model. But the same applies in media, in banking, in journalism and in politics. The cost of doing this is that it leads you to hubris, not listening to reality, and taking large hail marys when it’s not needed. The benefit of doing this is that you get to be seen as a genius, over and over again.
Hubris has had a long history and a complex etymology. It always meant excessive and undue pride. In ancient Greece it meant religious transgression or actual theft or assault, violating the natural order of things. Later it came to mean well deserved comeuppance, like getting punched live on stage to shame someone.
A lot of Silicon Valley VCs seem to latch on to brazen people: Adam Neumann, SBF, etc. Oh, sure, there are plenty of non-brazen entrepreneurs whom Silicon Valley invests in. But it is the brazen ones who seem to receive an outsized amount of attention, both from VCs and the public at large. There’s a certain mythos about brazen personalities, bucking convention in order to assemble their empire.
And few people have been more brazen, or more feted by Silicon Valley venture capitalists, than Sam Bankman-Fried. And the play was kind of brilliant in its cynical simplicity: get bucket loads of cash from venture capitalists to build out a centralized crypto trading system, run Alameda Research’s trading through the platform to juice returns on that fund, reinvest back into various venture capital funds: it was all very incestuous, and very lucrative. Layer on top of that a superb PR campaign complemented by buckets of cash being dumped on various politicians, and, well, before last week, SBF was well-positioned to ensure that regulations enacted regulations in his, and by extension, venture capitalists’, favor.
This is what DeFi proponents objected to. That in all their fervor to curry favor with the tonsorially gifted SBF, politicians and regulators threatened to throw DeFi under the bus and kill off their projects.
Which brings us to our next piece: Sophistry and the Savior
The sparkling shimmer of regulation is much like that little light on the end of the angler fish, alluring not just to hapless victims who can’t think for themselves and so look to politicians thousands of miles away for protection, but just as alluring to those politicians, for in its glow they see themselves as saviors.
Alas, my view is just that of a radical minority. Surely others reading this think, “This is actually an obvious case of not-enough-regulation, ser. Let’s get a new bill together and solve this with the fine scalpel of Federal oversight. A committee shall be formed, or better yet, several committees. Hearings shall be heard! American will demonstrate its leadership with a resolute commitment to consumer protection.”
The post continues, in much the same vein:
Remember in 2008 when your system went down the shitter and hundreds of billions of dollars had to be taken from taxpayers (honestly through taxes or dishonestly through inflation) to bail out the heavily regulated financial institutions that nearly brought down the world economy and sent tens of millions into poverty and despair?
Well, the builders of the crypto industry without a dollar of tax money, built an alternative. This started with Bitcoin as a neutral, honest, base money that anyone could use and access according to transparent rules. It expanded with Ethereum and smart contracts, such that all manner of decentralized financial tooling could be built.
Regulation is the kind of thing that, like Marxism, sounds interesting in the abstract. But it all too often has terrible negative consequences, whose costs are frequently not borne by the people advocating for the regulation, but rather by individuals or small businesses who can’t afford to lobby influential politicians and regulators.
And that is the system to which DeFi proponents object.
I don’t really have any great analysis to offer here. All I have to note is that I should have paid closer attention to the regulatory debates going on, than to simply trust that SBF’s argument was the correct one.
Live and learn.