Big exchanges and investors say traditional agencies don’t have the tools or expertise to oversee the sector.
The cryptocurrency industry suddenly found itself in the crosshairs of a host of U.S. state and federal regulators this fall, facing millions of dollars of fines, threats of lawsuits, and warnings of new rules to come.
Crypto executives say the abrupt—and sometimes overlapping—spate of enforcement threatens to chill innovation, especially in areas where it’s not clear which laws apply.
Their solution? Let the industry help regulate itself.
Major exchanges including Coinbase and Gemini and prominent investors like Andreessen Horowitz have floated the idea of a crypto self-regulatory organization (SRO), arguing it could be better suited to oversee the new and complex industry on some issues than traditional agencies, which have struggled to apply decades-old rules to the new market.
Supporters say an SRO could be more agile in deciding on rules around new products, using its members’ expertise and resources.
“The job of a regulator is not easy when you’re confronting something new,” says Greg Xethalis, chief compliance officer at crypto investment firm Multicoin Capital. “The question is, how do you get to an environment where the regulatory infrastructure can be more nimble?”
Self-regulation has a long history on Wall Street. SROs, which are funded and governed by their own members, set rules, perform inspections, and mete out penalties to members, with authority delegated by Congress and regulators such as the Securities and Exchange Commission.
A few years after Congress formed the SEC as part of President Franklin D. Roosevelt’s New Deal, the agency delegated some oversight of brokers and brokerage firms to the newly formed National Association of Securities Dealers, an SRO.
Eighty years and a few reorganizations later, the NASD is now the Financial Industry Regulatory Authority, or Finra, with 3,600 employees helping to license, police, and levy penalties on hundreds of thousands of brokers, under the SEC’s supervision. A similar SRO polices commodities brokers, and the major stock exchanges are themselves self-regulatory organizations.
For crypto, an SRO could be responsible to go after at least some infractions—referring serious fraud to agencies like the SEC.
For example, the SRO could adjudicate whether a newly issued token should be classified as a security, a commodity, or something else, which proponents say would go a long way toward helping firms issue new ones without fearing an enforcement action years later.
It could also handle such mundane tasks as setting product disclosure rules or standards governing how to manage customer data. Its behavior would be overseen by the SEC and other agencies, which would have the final say if they disagree with an SRO’s decisions.
Established SROs such as Finra have been criticized for weak enforcement that caters to their members rather than the public they’re supposed to serve, with some detractors comparing them to cartels. And some crypto skeptics say an SRO wouldn’t be able to adequately address what they see as the industry’s biggest problems: fraud and serious legal violations that are the bread and butter of powerful watchdogs such as the SEC and the Commodity Futures Trading Commission.
Already this year, the SEC has threatened Coinbase with a lawsuit over a proposed product, multiple state regulators have gone after crypto firms for allegedly selling unregistered securities, and the CFTC has fined Tether $41 million for lying about the assets backing its stablecoin.
“This is an industry that needs guardrails and potentially structural changes,” says Andrew Park, a senior policy analyst for the Americans for Financial Reform, an investor advocacy group, pointing to stablecoins and other crypto products that have close parallels to the traditional financial system but aren’t following the same regulations. “If there was an armed robbery going on, an SRO is outside giving the getaway car a parking ticket.”
Industry advocates have already tried to form a crypto SRO, but this has yet to gain acceptance from lawmakers. One contender started by Gemini has been inactive for years.
Another, called the Association for Digital Asset Markets (ADAM), has members including crypto exchange FTX and investor Galaxy Digital and has developed a code of conduct that could serve as a foundation if it were to gain SRO status.
Most who support forming an SRO agree that such an organization would likely need an act of Congress to allow the SEC, CFTC, or other regulators to register it and potentially delegate authority to it.
Although such a bill could take years to pass, senators that include Wyoming Republican Cynthia Lummis have said they plan to create comprehensive crypto legislation that could provide an opportunity for supporters of an SRO to put their plan into action.
“If we can show that SROs would actually increase regulation and registration under the oversight of the SEC and CFTC, it would get buy-in from the agencies and also give the industry an opportunity to have a voice,” says Michelle Bond, chief executive officer of ADAM.
BOTTOM LINE – Crypto executives propose to play a role in how the industry is policed. While it could take years for self-regulation to happen, some lawmakers appear open to the idea.
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