How Crypto Can Regulate Itself
While 2018 has been a year of increasing regulation in the cryptocurrency industry, there are still big gaps. Just this week, the Wall Street Journal published a study on online "pump and dump" groups, where traders join forces to drive up token prices. According to the study, these groups have generated a whopping US$825 million worth of trades on exchanges in the past half-year alone.
This kind of market manipulation is banned on stock exchanges, but allowed to flourish in the crypto world. Meanwhile, the fast and furious pace of development in the blockchain industry has forced regulators to play catch up.
That's partly why companies in the crypto community are exploring self-regulatory organizations (SROs) or non-government organizations that draft, oversee, and influence legislation. In the US, for instance, the Financial Industry Regulatory Authority (FINRA) regulates thousands of brokerage firms, establishes best practices for the industry, resolves securities disputes, and has the power to fine, suspend, or ban brokers that break the rules.
Yesterday, the Japan Virtual Currency Exchange Association (JVCEA), formed by the country's 16 cryptocurrency exchanges after the Coincheck hack in March, applied to be a “certified fund settlement business association.” If JVCEA wins approval from Japan’s Financial Services Agency, the group hopes to become the self-regulatory body for Japan’s crypto exchange industry.
“I believe an SRO-like entity [for the cryptocurrency industry] could develop industry standards that could inform, or even serve as a blueprint for, future action,” said Brian Quintez, commissioner at the US Commodities Futures Trading Commission (CFTC), at the DC Blockchain Summit in March.
In particular, “the rules and best practices published by an SRO are informed by practical experience because the organization has input from industry participants,” he said.
JVCEA, for example, has drafted a number of proposed policies that specifically target insider trading and money laundering. New tokens that can’t be traced to previous sellers, such as Monero, would be prohibited from exchanges. Regular audit reports -- sent to JVCEA -- would also be mandatory for members.
Of course, SROs are not a silver bullet. For one, it’s not easy to run an effective SRO, or one that has enough influence or regulatory backing to actually enforce penalties on members who break the rules. Conflict of interest and transparency is another concern -- one that has been specifically directed at FINRA.
In the crypto world, it's not easy to gather enough support across different companies to form a respected SRO. In March, Bitcoin billionaire Cameron Winklevoss, on behalf of digital asset exchange Gemini, proposed an outline for a SRO, but didn’t gain enough momentum or support to roll it out.
“Everyone’s got their own ideas of who should be in charge and so from that perspective, you get less standardization that way when you have competing bodies,” said Jenny Cieplak, counsel with Crowell & Moring in Washington, in an interview with Bloomberg Law. “I think the formation of the ecosystem is going to be fractured at first.”
Still, as the number of crypto products continue to increase and more retail investors are exposed to trading, SRO-like entities could be a path to working with government regulators on more progressive policies. At the very least, it's a way for the crypto industry can start trying to hold itself accountable.