The growing number of breaches and incidents at bitcoin exchanges has earned the cryptocurrency a bad name. Regulation may provide an avenue for exchanges to clean up their conduct. It will, however, take time as governments throughout the globe struggle to comprehend and accommodate crypto activity within current legal systems.
Meanwhile, CFTC Commissioner Brian Quintenz has urged bitcoin exchanges to self-regulate. The notion is not new, and self-regulating industry groups exist in other marketplaces. Organizations such as the National Futures Association, which represents commodities traders, and the Financial Industry Regulatory Authority, which represents securities traders, have aided in the expansion of their respective markets.
Here’s a brief primer on self-regulation.
What Is Self-Regulation?
Self-regulation in the context of cryptocurrencies refers to the formation of norms, industry associations, and a code of conduct for market players to follow in order to do business within the ecosystem. These standards may cover a wide range of topics, from understanding your customers (KYC) to preserving transparency to protecting against attacks.
The International Organization of Securities Commissions (IOSCO) has outlined a set of components that constitute self-regulation in a report. Transparency and accountability, contractual connections and coordination, and information exchange are among them.
Government regulatory bodies may give further scrutiny to self-regulation organizations. The CFTC, for example, approves significant regulations produced by the NFA (National Futures Association). Simultaneously, the NFA is authorized to audit and oversee non-clearing Futures Clearing Merchants (FCMs).
Will Self-Regulation Bring Order to the CryptoWild West?
Government regulators are often tasked with restoring order to an uncontrolled financial environment. However, self-regulation might help a government agency’s mission by ensuring that the growth of the young crypto ecosystem is not haphazard.
Because member organizations follow the best practices established in its principles, self-regulation agencies may also assist develop consumer confidence. It also reduces the cost of enforcing regulations by self-policing.
The reactions of bitcoin exchanges to recent attacks show the effects of self-regulation. Following the recent Coincheck attack, bitcoin exchanges in Japan, for example, strengthened regulatory security procedures.
Customers who were impacted by the breach were also given partial reimbursements. Following the South Korean government’s warning against overheated trading, digital currency exchanges affiliated with the Korean Blockchain Association announced plans to develop techniques to safeguard investors’ funds and increase transparency in their listing process.
However, some government agencies fear that the bitcoin business is incapable of self-policing. Senator Elizabeth Warren, chairman of the Senate Banking Committee, has urged the SEC to “use its full jurisdiction” to regulate the cryptocurrency business, and Commission Chairman Gary Gensler has suggested a multi-agency task group on digital assets.
How Many Countries Have Implemented Self-Regulation?
There has been a global trend toward bitcoin exchange self-regulation. Self-regulation in bitcoin exchanges was pioneered by Japan and South Korea.
The Japan Blockchain Association (JBA) has 127 members, including 35 cryptocurrency exchanges. It establishes guidelines and encourages the creation of a stable business environment and a user protection framework for virtual currency and blockchain technology.
The blockchain organization in South Korea comprises 25 members with similar goals. The Blockchain and Cryptocurrency Committee (BACC), comprised of seven cryptocurrency exchanges in India, has established a formal board to ensure compliance with its code of conduct.
CryptoUK, a trade association with its own self-regulatory code of conduct, was founded by the UK’s seven largest crypto firms. Among the steps specified on the organization’s website is a pledge to separate fiat consumer money from business assets and to guarantee that customer monies remain reimbursed if the exchange experiences a breach or collapse (both of which are considered “insolvency events”).
The owners of the Gemini Exchange in the United States have suggested a Virtual Commodity Association to govern cryptocurrency exchanges and other enterprises. Members of the VCA would agree to obey the Association’s guidelines and incur fines if they did not.
The Bottom Line
Until governments across the globe are able to develop an appropriate legislative response to the emergence of cryptocurrencies and blockchains, self-regulation provides a mechanism to guarantee that consumers are not fooled by fraudulent elements within the ecosystem.
Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is very dangerous and speculative, and this article is not a suggestion by Investopedia or the author to do so. Because every person’s circumstance is different, a knowledgeable specialist should always be contacted before making any financial choices. Investopedia makes no guarantees or warranties about the accuracy or timeliness of the information provided on this site. The author holds a minor quantity of bitcoin as of the day this article was published.
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