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Proof of State is the Wednesday edition of Fortune Crypto where Leo Schwartz delivers insider insights on policy and regulation.

Decentralization is a spectrum. Developers can talk all they want about their projects being governed by code, but not all blockchains and protocols are made equally.

I say all this because, as no one should be surprised, Coinbase’s new blockchain, a layer-2 built on top of Ethereum called Base, is filled with scam tokens. That was the case before Base’s official launch last week, when it was still in beta mode—look no further than the infamous Bald token, where a shrewd developer manipulated a liquidity pool to turn $500 into $1 million in a single day in late July, rug-pulling their unsuspecting victims.

According to new data from crypto security firm Solidus Labs, however, Bald is just the tip of the iceberg. Solidus has identified 516 tokens with code specifically designed to scam potential buyers through different strategies, from obfuscating transaction fees to creating so-called honeypots, where buyers are blocked from reselling tokens. According to Solidus, these tokens have already attracted $3.7 million worth of trading volume, with 100 of the tokens traded within the past week.

I spoke with Chen Arad, the cofounder of Solidus, who made clear that the issue is not unique to Base. The reality is that scammers will flock to anything buzzy, with decentralized exchanges on the blockchain attracting tens of millions of dollars’ worth of volume. Because anyone can create tokens on Base, as with most public blockchains, scammers could easily take advantage of the inflow of new users.

The reason I bring up decentralization, however, is to ask a more consequential question about blockchains: Where does the responsibility lie for the inevitable influx of scam tokens? The first candidate, of course, is users, who should probably be savvier when it comes to new projects. Solidus Labs even has a tool called Token Sniffer, where you can enter tokens by name or address to view an audited analysis of whether the token is likely to be a scam, analyzing factors like liquidity and ownership.

That doesn’t seem fair, you may think. Perhaps it would be nice not to have to worry that every new project is filled with scams. The next natural candidate, then, would be Coinbase, the developer of Base, which could create some sort of requirements for the minting of new tokens. In a Twitter post earlier this week, Coinbase protocols lead Jesse Pollak pushed back on this idea, arguing that Coinbase is fully permissionless and decentralized. In other words, Coinbase does not have “full control” over Base.

I find it hard to believe that anyone could argue that Base has the same level of decentralization as Bitcoin. Still, maybe you buy the argument and believe the old adage that “code is law.” There is a third candidate, however: regulators. State and federal agencies certainly don’t care about decentralization, at least to the same degree as the crypto crowd. Just look at the Ooki DAO case, where the CFTC successfully targeted both the founders of and participants in a “decentralized” project for operating an unregistered trading platform.

While much of crypto regulation has been reactive, through enforcement actions, litigating against scams and other illegal schemes, the public and transparent nature of blockchain would allow for a more proactive approach. What’s stopping the SEC or CFTC from using Token Sniffer to shut down tokens that are hard-coded with scams? If they decided to employ that strategy, would they go to the token issuers—or directly to Coinbase?

“We welcome clear regulation that balances consumer protection while also supporting innovation,” a Coinbase spokesperson told me in a statement.

The frequent refrain with crypto oversight is that lawmakers are dragging their feet. In the meantime, however, regulators are wising up to the fact that blockchains are creating a new frontier for policing. In that inevitable future, nothing can be truly decentralized.

Leo Schwartz
leo.schwartz@fortune.com
@leomschwartz

DECENTRALIZED NEWS

The crypto market maker GSR is scaling back, with key executives departing amid the bear market. (The Block)

A look at the new PayPal CEO, the NFT-holding Alex Chriss, as the company moves deeper into crypto with the launch of its stablecoin. (Fortune)

Coinbase received regulatory approval to begin offering crypto futures products to customers in the U.S. (Coinbase blog)

Binance is shutting down its crypto payments service, which it rolled out last year, as it focuses on “core efforts.” (CoinDesk)

Prosecutors have begun to lay out the evidence they will present at Sam Bankman-Fried’s trial, including notes from former Alameda CEO and onetime girlfriend Caroline Ellison. (Fortune)