Never let a crisis go to waste
Never let a crisis go to waste
Plus Binance is making everyone nervous but it is Trump NFTs that will usher in the end times.
Inside this issue:
Never let a crisis go to waste
How to be a soap bubble (reader submitted)
Binance is making everyone nervous
Official Trump NFTs because it is the end times
Never let a crisis go to waste
Roughly two days after Alameda/FTX co-founder and Shakespearean tragedy Sam Bankman-Fried was arrested by local Bahamian authorities, Elizabeth Warren unveiled the Digital Asset Anti-Money Laundering Act, a sweeping piece of proposed legislation aimed at extending financial surveillance rules into the crypto economy.
Unfortunately none of the new rules in the proposed bill would do anything to prevent the next FTX or protect American investors from it. We don’t really need new laws to prevent the next FTX because fraud is already very illegal. SBF is currently charged with eight different crimes adding up to 115 years of cumulative jail time. As we have talked about before the story of FTX is not a failure of crypto — the unique and interesting aspects of crypto as a technology actually improved transparency and ultimately exposed the FTX fraud.
Sadly it would appear that Senator Warren is still not a reader of Something Interesting. The new bill is not intended to improve the governance or transparency of crypto companies at all — it is focused entirely and exclusively on surveilling customers.
The bill requires banks/exchanges to gather new KYC/AML data on private addresses of users who aren’t necessarily customers. It bans the use of privacy tools (Tornado Cash, e.g.) and private assets (Monero, Zcash, e.g.). Most problematically it designates the developers of a self-custody wallet as money transmitters and most bizarrely it includes a section demanding greater reporting about the locations and traffic to Bitcoin ATMs. FTX evaporated at least ~$10B of customer assets and Senator Warren’s proposed solution is to increase surveillance on anyone who wants to withdraw.
At the moment it’s not especially likely that this bill will become law and it would probably be unconstitutional anyway. Senator Warren has sponsored 536 bills and only one has become law: a bill amending the rules for when the POW/MIA flag was displayed on Federal properties. There is also very little time remaining this session for passing meaningful legislation to pass. It’s clear that Senator Warren is taking advantage of the fall of FTX for political optics even though in practice her proposed legislation would do very little to help.
Senator Warren and I agree about one thing, though! Bitcoin absolutely is a matter of national security.
Binance is making everyone nervous
One mildly positive side-effect of the fall of FTX is the sudden popularity of exchanges embracing proof-of-reserves. In the aftermath of FTX a flurry of exchanges have rushed to release evidence of their reserves. To be clear showing a proof-of-reserves does not make an exchange safe. Proving you hold a certain quantity of crypto assets is like posting an Instagram photo holding a pile of cash. It is a snapshot that proves you held some money but it doesn’t show who you might have borrowed that money from or who you might owe it to. It is not a proof-of-solvency.
Still, proof-of-reserves are a level of transparency that was never possible in traditional finance and are unambiguously a good thing. For consumers. They aren’t as much fun for exchanges, especially exchanges that are harboring awkward truths they would really rather not go into right now. Sometimes what you choose not to reveal is even more revealing than what you reveal. Consider this review of Binance’s proof-of-reserves from competitor CEO Jesse Powell of Kraken:
It is a bit uncomfortable that the proof-of-reserve process is strangely shakey for an industry leading exchange like Binance, but the good news is they partnered with the Mazars Group to release this proof-of-reserve, and the Mazars Group is an established accounting firm founded all the way back in 1945. The bad news is that the Mazars Group has since deleted their Binance proof-of-reserve assessment and paused all work in the crypto industry generally. Which is probably fine, right? Hopefully the Binance CEO is confidence inspiring when interviewed:
The concern here isn’t really that Binance is running out of money, per se. They have seen significant withdrawals but they also have significant reserves. The bigger worry is that Binance has historically allowed users to open margin positions using BNB (Binance’s native exchange token) as collateral — which is good for driving demand for BNB and supporting price, but bad because BNB is not a good asset to be liquidating to cover debts in a crisis. The buyer of last resort for BNB is Binance itself, which means that Binance has probably taken on excess risk by letting customers use BNB as the collateral for margin positions.
As a rule Something Interesting does not offer financial advice but I do think that now is a good time to withdraw your assets from any exchange. Proof-of-reserves are very trendy, but self-custody is always in fashion. 🎩 👠
How to be a soap bubble
"Your last post talked about AI but didn’t touch on AI alignment or any of the possible doomsday scenarios for AI. Are you at all worried about that?" — several readers
Soap bubbles always naturally form a shape that minimizes their collective surface tension, regardless of how many soap bubbles there are or their relative sizes. Predicting that shape is quite difficult -- at least for us. Soap bubbles don't have any trouble doing it. Perhaps that's because we don't understand soap bubbles quite well enough yet! But it is also possible it is because being a soap bubble is fundamentally easier than simulating one. Perhaps the universe exists at a greater degree of complexity than it is capable of calculating.
In other words: I do not particularly think we are very close to the verge of self-aware or self-reinforcing intelligence. I think we are becoming skilled in the art of blowing bubbles and we will eventually become uncomfortably aware of how similar we are in practice to bubbles ourselves.
IMHO general purpose intelligence does not and will never exist. The people who worry we might create it "accidentally" are optimists masquerading as pessimists -- worse, they are letting their optimism distract from real problems. The most pressing moral problems of practical reality are about negotiating with actual power structures, not hypothetical constructs. Most of the AI alignment conversation feels to me like designing theoretical defenses against perfectly spherical cows. I'm not convinced they are seriously engaged with the limits of the practical universe.
Then again, maybe someone will connect GPT with CRISPR and the hypothetical will abruptly become actual? I don't know. It seems inevitable that people will periodically try to set algorithmic doomsday fires but I have difficulty believing that starting a universe-engulfing conflagration is actually all that doable? Like imagine an arsonist trying to set fire to North America. You could definitely do some damage! But trying to homogenize such a large and diverse space into a single chemical reaction is IMHO insurmountably difficult.
I feel the same about AI. Many forest fires are coming! But not the end of forests.
Other things happening right now:
I suppose I am obligated to mention that Donald Trump released a suite of apocalyptically ugly NFTs. The tokens feature art that was stolen from Google image search and a series of prizes like dinner with Trump in Miami or ten minutes of zoom time. The only catch? Almost every prize can be replaced with another NFT if Trump doesn’t feel like delivering. Also the TOS link is a 404. Obviously the collection raised ~$4.4M in 24 hours and is currently trading above the mint price. This is the hell we have built for ourselves.
