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Alex Kimani

Alex Kimani

Writer, Divergente Research LLC

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Divergente Research LLC and Safehaven.com. 

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Can Crypto Exchanges Self-Regulate?

Winklevoss

Gemini Digital Currency Exchange founders, Cameron and Tyler Winklevoss (aka the Winklevoss twins) have maintained a low profile ever since the SEC turned down what was slated to become the first bitcoin exchange-traded fund, the Winklevoss Bitcoin Trust in 2017. The SEC cited the possibility of fraudulent and manipulative practices, especially for retail investors as a key reason for its rejection.

The brothers were down but not out, maintaining an upbeat outlook: “…we look forward to continuing to work with the SEC and remain deeply committed to bringing a regulated bitcoin ETF to market and building the future of money."

And now the charismatic duo is back … this time with a plan to police crypto trading.

In March, they submitted a proposal to create a self-regulatory organization (SRO). The organization is meant to be a non-profit group that aims to develop industry standards and work with industry regulators including the U.S. Commodity Futures Trading Commission (CFTC) to prevent fraud and promote transparency.

The idea received the full backing of CFTC Commissioner Brian Quintenz, who has in the past called for the creation of a crypto SRO:

“Ultimately, a virtual commodity SRO that has the most independence from its membership, the most diversity of views, and the strongest ability to discover, reveal, and punish wrongdoing will add the most integrity to these markets. I encourage Gemini (or any other market participant, advocacy group, platform, or firm) to be aggressive in promoting these qualities within any SRO construct.” Related: Police Bust China’s Largest Bitcoin Hacking Scheme

The CFTC has legal jurisdiction over commodities including bitcoin and ether, though it lacks the jurisdiction over cash and spot markets that are derived from commodities. The organization can, however, regulate fraud or market manipulation under the Commodity Exchange Act (CEA).

On Monday, the Winklevoss’ new proposal took another step after they unveiled an SRO they have dubbed the Virtual Commodity Association (VCA). VCA consists four U.S.-based crypto exchange namely Gemini, Bittrex, Bitstamp and bitFlyer USA.

Crypto self-regulation is not as strange as it first sounds. The concept is actually modeled off equities and securities markets, where multiple interest groups develop industry standards in conjunction with regulators with a view to reducing fraudulent practices without stifling innovation.

In fact, CoinRoutes co-founder has lauded the move, calling it a great sign that multiple competing exchanges have agreed to come together to improve the industry and also for mutual self-interest.

Self-Regulation Can Fast-Track Approvals

Regulatory approval by government organizations like the SEC can take ages.

Related: Is The iPhone X Too Successful?

In early August, the SEC extended the deadline for making a decision on the two proposed bitcoin ETFs, VanEck SolidX Bitcoin Trust and Direxion Bitcoin ETF, to September 30, 2018. A document by the organization says it had received more than 1,300 comments on the SolidX ETF and needed more time to consider the proposed rule change.

SROs can fast-track the process of regulating the crypto industry. But with so many gray areas, it’s not yet clear how VCA will proceed with the whole process.

It’s unlikely that the SEC and CFTC will be directly involved in crafting crypto rules though they could offer guidance that will be informed by the cybersecurity policies it has already developed for exchanges and clearinghouses.

One thing is clear though—the VCA is an idea whose time has come.

By Alex Kimani for Safehaven.com

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