SROs can eventually provide the “connective tissue” between the crypto industry and U.S. government as regulatory infrastructure forms.
As adoption takes off, the crypto industry is exerting increasing influence on American society. This can be seen in its lobbying efforts and political action committees, for example, as well as its own organizational efforts, such as forming business associations that promote crypto at the state, regional and national levels. Yet another way crypto is influencing society is through self-regulation.
The broader impact of self-regulation may be less apparent than when a PAC finances a political campaign or a startup is nurtured in a crypto industry-sponsored accelerator, and that limited visibility probably reflects the extent of the influence of self-regulatory organizations (SROs) at present. But SROs are helping shape the crypto industry itself, and they may eventually have a role in the crypto regulatory framework that is beginning to come out of the United States federal government.
Getting started self-regulating
The first crypto SROs formed outside the United States, and the Virtual Commodity Association, proposed by Gemini in March 2018, is considered the first attempt to create one in the United States. The VCA’s stated mission is “to establish an industry-sponsored, self-regulatory organization (SRO) designation for U.S. cryptocurrency marketplaces to oversee virtual commodity marketplaces.” To that end, it formed as a working group, with Gemini and bitFlyer as members, and established an assortment of committees the following year. The organization is not yet very active.
Later in 2018, a group of 10 financial and tech firms created the Association for Digital Asset Markets. According to its website, ADAM now has 31 members and five partnering law firms.
Robert Baldwin, head of policy at ADAM, told Cointelegraph that the organization is a standard-setting body that seeks to protect the spot market for digital assets. It provides insights “on the Hill,” interacting mainly through written comments, crypto “sprints” and meetings with stakeholders.
Industry efforts to set standards are likely seen favorably by regulators, said Anthony Tu-Sekine, head of the blockchain and cryptocurrency group at Seward & Kissel LLP. However, he told Cointelegraph that establishing an SRO with authorities delegated by regulatory bodies would likely require congressional backing and would need to be registered in accordance with the Securities Exchange Act of 1934.
Getting that done “would be a big lift,” according to Tu-Sekine, especially for a cryptocurrency exchange, as it would list both securities and commodities and would have to deal with both the Securities and Exchange Commission and the Commodity Futures Trading Commission.
ADAM may get the boost it needs from Congress, however, if Senators Cynthia Lummis and Kirsten Gillibrand’s forthcoming crypto bill becomes law. It reportedly calls for the creation of an industry SRO.
Getting started regulating
An important function of a U.S. SRO is to provide uniformity across the jumble of state laws and the underdeveloped federal regulatory framework. As the actions required of President Joe Biden’s Executive Order on Ensuring Responsible Development of Digital Assets are carried out, the federal government will begin filling in the missing pieces of the regulatory landscape, and the potential role of an SRO will change.
In an April 4 speech at the University of Pennsylvania, SEC Chairman Gary Gensler emphasized that “There’s no reason to treat the crypto market differently just because different technology is used,” indicating that he sees a clear path for regulatory efforts already.
The SEC and CFTC each have “decades of history and precedent for determining what is a security and what is a commodity, and they can see their places on the crypto market,” Andrew Lom, global head of private wealth at Norton Rose Fulbright US LLP, told Cointelegraph. The agencies have come into conflict over the years but have also cooperated in important ways, such as under the Dodd-Frank Act and likely even more behind the scenes, he added.
A crypto-industry SRO could “provide the connective tissue between the regulations, and between the industry and government,” Baldwin said. He is optimistic about the future of crypto regulation, as spot markets will have a regulator of primary jurisdiction, which will advance the asset class.
Tu-Sekine said the possible functions of a cryptocurrency exchange SRO include defining listing requirements, setting rules and operational procedures, and petitioning the SEC for rule amendments.
A matter of focus
Although ADAM states on its website that it “intends to build and maintain strong relationships with a wide range of stakeholders both inside and outside the US,” its focus on “the Hill” is evident. It is, for instance, deeply engaged with the Financial Industry Regulatory Authority’s Regulatory Notice 22-08. It says the SRO oversteps its traditional mission and discourages innovation by labeling some financial products as “complex.”
The Global Digital Asset and Cryptocurrency Association, founded in 2020, displays its international orientation in its name. CEO Gabriella Kusz told Cointelegraph that the organization takes a modern approach to self-regulation, embracing peripheral industries with open, inclusive membership and keeping the public interest firmly in focus.
The Global DCA is based in Chicago and has 70 member organizations in at least 11 countries. It works with 15 global partners, including ones in the United Kingdom, European Union, Nigeria, India, Kazakhstan, Armenia and Kosovo. Kusz said the organization is gaining about one new member each week. All members are vetted for their Anti-Money Laundering and Know Your Customer processes, as well as their alignment to the Global DCA code of conduct.
According to Kusz, the Global DCA’s activities consist of standards setting, education and advocacy through data collection, research and insight. Membership fees are used to finance free education. A certification program is planned to “assure competent professionals capable of meeting the needs of the market.” It also interacts with authorities, holding 37 meetings with U.S. congressional offices in 2021.
Federal regulation is necessary but not sufficient, Kusz said. Rather, a holistic approach to a regulatory framework is needed. “Regulatory bodies need to move away from an adversarial role toward community management to help shape an ecosystem that works,” she said. “I am not fearful” about regulation, she continued, “but optimistic. […] It will take multiple organizations to steward the industry and bring forward innovation. It’s not competitive.”
The Global DCA was joined this year by yet another self-regulatory effort, the Crypto Market Integrity Coalition. CMIC was spearheaded by Solidus Labs and promotes a pledge to encourage “a fair digital asset marketplace to combat market abuse and manipulation and promote public and regulatory confidence” in crypto worldwide. “We welcome regulators who want to learn more about CMIC or have ideas about how industry can promote market integrity in digital asset markets to contact us,” according to its website. Its membership reached 30 earlier this month.