Frank Sinatra crooned, “You’re riding high in April, shot down in May.” When it comes to CEO of the FTX crypto exchange and would-be policy impresario Sam Bankman-Fried (“SBF”), it’s more like “You’re throwing twitter shade on Saturday, looking for a bailout next Tuesday.”

In crypto, karma moves fast. And in Washington, a crisis—such as a prominent brand in a buzzy industry losing billions—is thought to be a terrible thing to waste. Nonetheless, policymakers should not hastily patch perceived regulatory gaps in counterproductive ways, such as by scapegoating crypto technologies that mitigate by design some of the very risks plaguing FTX. Rather, the fate of FTX underscores the need for careful line drawing between what FTX is—a centralized crypto exchange, or a financial intermediary—and decentralized crypto exchanges that remove the need for such intermediaries.

As of this writing, the story of the rise, run on, and halting rescue of international crypto exchange FTX (not to be confused with a separate U.S. entity, FTX​.US) is still developing. According to SBF himself in a profanity-laden twitter mea culpa, even he is “still fleshing out every detail.”

But at a high level, here are some data points so far. In 2017, SBF founded trading firm Alameda Research. He made a mint of money arbitraging the difference in price of Bitcoin in the U.S. and that in Korea and Japan. In 2019, he founded FTX ostensibly to build a better mouse trap for crypto trading.

As a business, FTX offers leveraged and margined crypto trading, which present classic risk management considerations. FTX also issued its own crypto token, FTT, offering holders discounts on FTX trading fees. For his part, SBF is an active participant in the Washington crypto policy debate, including on proposals for crypto exchange regulation. Not everyone loves this.

On October 29^th, SBF tweeted a joke (since deleted) about Changpeng Zhao (“CZ”), the Chinese-Canadian CEO of rival crypto exchange Binance, not being allowed in Washington, DC. On November 2^nd, a report came out that SBF’s trading firm Alameda Research held significant amounts of FTX’s FTT token, leading to questions about the relationship between the two ventures. CZ’s Binance also held a lot of FTT, which it received after exiting a prior investment in FTX. On November 6^th, CZ tweeted that based on the recent revelations, Binance would liquidate its FTT. That day, CZ also tweeted, “[W]e won’t support people who lobby against other industry players behind their backs.” (Incidentally, later in the song, Frank Sinatra also sang, “funny as it may seem, some people get their kicks stompin’ on a dream.”)

Following CZ’s liquidation announcement, FTX customers began to increase asset withdrawals from the platform. As Matt Levine writes, “The reason for a run on FTX is if you think that FTX loaned Alameda a bunch of customer assets and got back FTT in exchange. If that’s the case, then a crash in the price of FTT will destabilize FTX. If you’re worried about that, you should take your money out of FTX before the crash.” People were worried about that.

By November 8^th, SBF was tweeting about a possible bailout from Binance. The next day, Binance walked away from that deal. Today, SBF tweeted that he “filed FTX, FTX US, and Alameda for voluntary Chapter 11 proceedings in the US.”

Unsurprisingly, this week’s events have led to calls for greater regulatory scrutiny of the already-under-scrutiny crypto ecosystem. For example, House Financial Services Committee Chairwoman Rep. Maxine Waters (D–CA) called for “robust federal oversight and protections for consumers,” as the FTX news “highlights the urgent need for legislation.” In addition, Senate Banking Committee Ranking Member Sen. Pat Toomey (R–PA) noted, “This episode underscores the need for a sensible regulatory regime.…”

Any plans to heed such calls must first distinguish centralized crypto exchanges like FTX from other players in the broader crypto ecosystem, specifically decentralized finance, or DeFi, projects. Notably, Senator Toomey’s comments were careful to specify that the issues at hand involve centralized exchanges. Whereas centralized exchanges are made up of human intermediaries that customers turn to based on trust, decentralized exchanges are made up of software programs known as smart contracts, which are written to self-execute when specific conditions are satisfied.

DeFi projects composed of open-source smart contracts stored on public blockchains are auditable by design, making DeFi transparent by default. Centralized exchanges, by contrast, are not inherently open. It’s essential that policymakers looking to regulate crypto recognize these differences before subjecting DeFi to poorly tailored rules that risk undermining consumer protection itself.

Claims of fraud and contractual breaches—wherever ripe—ought to be vigorously pursued. When it comes to generic financial losses, however, neither DeFi nor the public should be on the hook for a private centralized exchange’s mismanagement of risk. For policymakers who would consider subsidizing private risk taking, increasing moral hazard, Sinatra’s words ultimately may offer the greatest wisdom about a bad day at the races: “That’s life.”