Can The Cryptocurrency Industry Regulate Itself?
It’s clear that the virtual currency sector is in dire need of consistent regulation, but, at the same time, everyone’s got a different opinion about how this might be achieved. One solution to the regulatory limbo that is recently getting traction amongst industry stakeholders is the idea for a U.S virtual currency self-regulatory organization (SRO).
In March 2018, the Gemini Exchange founders known as the Winklevoss twins advanced the idea of an independent and industry-sponsored CSRO – the Virtual Commodity Association (VCA) – that would be open for membership to virtual commodity exchanges and custodians.
The primary goal of the proposed CSRO is to fill the regulatory gap on the virtual commodity spot markets by the institution of industry standards and best practices, as well as by enforcing rules and supervising the members for compliance.
Since then the VCA has set a provisional meeting for September 2018 with its first members, including Bittrex, Bitflyer, and Bitstamp.
CFTC Commissioner Brian Quintenz is one of the most prominent advocates for a CSRO in the financial regulatory community and believes that the establishment of a CSRO could “create uniform standards for these trading platforms, reduce the possibility of regulatory arbitrage, and avoid duplicative regulation.”
And Mr. Quintenz isn’t the only one; conceptual support for this idea comes from all corners of the industry…But, is the crypto industry fit to regulate itself?
Potential needs for, and benefits of CSRO
The biggest issue arising from the lack of clear regulation in the virtual currency industry is the lack of security and trust in the ecosystem. Following numerous multi-million dollar hacks on cryptocurrency exchanges, industry stakeholders took matters into their own hands.
In Japan, sixteen registered crypto exchanges created the Japanese Cryptocurrency Exchange Association (JCEA) in efforts to mitigate the risk of hacks and restore consumer trust by developing compliance standards and best practices. Following the same idea, seven leading global crypto exchanges united to create the first self-regulating trade body called CryptoUK.
In nascent markets like the virtual commodity spot markets, CSROs may bring greater legal certainty, and restore trust and legitimacy.
CSROs have several advantages over government regulation; first, governments are limited in their understanding of the technology itself, and industry stakeholders have much-needed experience in the game and are far better suited to regulate themselves effectively.
Second, prominent industry actors have the ability to monitor and regulate themselves on a truly global basis – without regard to jurisdictional limitations. This eliminates the possibility for potentially hasty and harmful, politically-inspired regulatory reactions from governments, and it may lessen jurisdictional arbitrage.
It also provides industry stakeholders with greater influence over the government, giving them the power to lobby against any potentially detrimental regulatory actions.
Furthermore, CSROs will, hopefully, lessen the regulatory burden to government agencies by working with them and, as Commissioner Quintez himself puts it, they could conceivably “help bridge the gap between the status quo and future government regulation.”
Not so easy!
Even though there seems to be great optimism regarding CSRO in the media recently, achieving efficient self-regulation – especially in a principally libertarian and anarchist industry culture (such as the cryptocurrency one) – is easier said than done. The crypto community is, to say the least, ideologically heterogeneous and balkanized, and endeavors (or should we say – failures) such as The Bitcoin Foundation showcase this dichotomy in the crypto community better than anything else.
CFTC commissioner Rostin Behnam, as well as other industry experts, consider the virtual commodity spot markets as immature, and maintain that an “SRO would be unsuitable for such an embryonic industry.”
Moreover, a truly efficient CSRO would have to operate with the blessing of, and in line with the relevant government regulators — which is paradoxical, considering the reasons for self-regulation in the first place.
Furthermore, if we ever ought to see an effective CSRO in reality, government support – as necessary as it is – is only one piece of the puzzle. Establishing and enforcing penalties and detection mechanisms for fraud and other misconduct, as well as ensuring member accountability and compliance is conditional on the support from the industry itself. Adequate enforcement mechanisms must be set in place in order to incentivize relevant industry stakeholders to become members of the CSRO, instead of choosing not to join altogether.
Lastly, effective regulation – especially in the case of novel technologies such as DLT and virtual currencies – is a complex and multi-layered process, and CSROs are most definitely not a one-size-fits-all solution to all of the regulatory problems the crypto industry is currently facing.
The author is not currently invested in digital currencies.