Can self-regulatory organizations (SROs) offer a solution to the bitcoin market’s regulatory issues?
Tyler and Cameron Winklevoss, founders of cryptocurrency exchange Gemini, believe so and have recently proposed a Virtual Commodity Association, a self-regulatory organization for cryptocurrency markets that promotes “price discovery, efficiency, and transparency” through the adoption of industry standards. (See also: Everything You Need to Know About Gemini, the Winklevoss Bitcoin Exchange.)
It intends to bring, among other things, information exchange, rules-based marketplaces, and monitoring technologies to an industry whose inner workings are mostly concealed from public and government scrutiny. (For further information, see Should Cryptocurrency Exchanges Self-Regulate?)
Members of the crypto markets have reacted cautiously to their suggestion.
“The (cryptocurrency) sector suffers from a lack of transparency, sometimes ethics, and, to a significant degree, clearly defined regulations that players may follow,” says Rob Viglione, inventor of the cryptocurrency Zen Cash.
The combination of an opaque technology and an open environment has elicited strong responses and aggressive declarations from economists and government officials. According to Viglione, there is a risk that government regulatory balances would “tilt too far in response to egregious conduct” by bitcoin exchanges.
The implementation of regulations may result in a few practical advantages for SROs. Minimum capital requirements and audits, for example, might assist avoid insolvency and promote confidence. Most cryptocurrencies swap with fiat currencies and Tether, a token that trades at parity with the U.S. dollar and claims to have similar quantities of the fiat money in it bank account as backing. This might be an issue.
“Exchanges that interact with fiat (money) face the added danger of liquidity crises or full bankruptcy,” says Rachel Lam, vice president of regulatory strategy at Polymath, a company that offers services for granting security tokens to organizations. (See also: US Regulators Subpoena Tether and Bitfinex Crypto Companies.)
A self-regulatory organization could also contribute to the preservation of an ecosystem of innovation in cryptocurrency markets. Much of the investment in cryptocurrencies is dependent on the underlying protocols’ potential development. Recent issues, whether they are related to a delay in transaction speeds or escalating transaction costs, have further underlined the necessity for more protocol development. (See also: Bitcoin’s Lightning Network: What Is It and Can It Solve Bitcoin’s Scaling Problem?)
Government regulation may stifle innovation by burdening it with compliance requirements. SROs are a middle-of-the-road option. “Hopefully, for regulators, this means protecting consumer safety without restricting innovation,” adds Polymath co-founder Chris Housser.
To be sure, self-regulatory bodies for monitoring financial markets have been suggested before. Back in the 1970s, an accelerated expansion in futures contracts and options trading led to a surge in futures fraud and unethical individuals inside its ecosystem.
The newly constituted Commodities and Futures Trading Commission (CFTC) fought to preserve order but failed, and was even regarded by some as “one of the most messed up (agencies) in the whole Federal Government.” The eventual consequence was the formation of the National Futures Association (NFA), an SRO for futures markets that collaborates with the CFTC to bring order to the sector. The creation of the NFA provided order and consensus to the futures market.
Not a Magic Bullet
Similar, concentrated attempts have already been made to bring order to the bitcoin industry. Following the recent Coincheck breach, for example, Japan’s bitcoin exchanges banded together to create an SRO. South Korean cryptocurrency exchanges established one in November 2017. (Also see Coincheck.)
Despite their popularity, SROs may not prove to be a panacea for an industry’s difficulties.
The NFA, for example, has been accused of fabricating facts and altering statistics to achieve its goals. A comparable scenario in bitcoin markets might result in the collapse of various markets, ranging from exchanges to futures.
Much is also dependent on the agency’s governance. “As with any governing body, it (the SRO) must remain focused on its goals, respond to its constituents, and prevent abuse of authority,” adds Lam of Polymath.
It is also unclear how an SRO will work inside the crypto business in the lack of facts concerning the Winklevoss twins’ plan. For context, the NFA is responsible for a wide range of activities. These range from conducting exams for trading futures to performing audits on members to offering swap execution facilities. The rapid development of cryptocurrency markets has created some large gaps in their ecosystem. It remains to be seen if a single entity or coalition can fill such voids.
“This (self-regulation) will not be completed by a single entity of ecosystem initiatives,” says Joseph Weinberg, head of Shyft Network, a blockchain-based solution for identity compliance, adding that the G20, OECD, and FSB are all working on the same issue. “By using blockchain technology and open-standard protocols, crypto markets may intrinsically impose transparency.” And I believe that as an industry, we can develop a common set of rules that will promote openness in our markets and throughout the globe.”
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 owns 0.01 bitcoin as of the day this post was published.
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