Although the cryptocurrency industry is filled with fraud and regulatory uncertainty, a number of cryptocurrency companies formed self-regulatory organizations (SROs) as a way to improve the industry’s reputation. While self-regulation may help the market mature, according to a Business Insider article published on Oct. 8, legal experts are questioning the impact of self-regulatory bodies and are highly skeptical as to whether they can deliver strong, effective results.
Virtual Commodity Association to Establish Industry Best Practices
Uncertain regulatory environments often attract bad actors, which leads to a number of problems such as scams, hacks, and fraudulent activities, which are highly evident in the cryptocurrency sector. Business Insider reported in April that from 2011 to 2018, the cryptocurrency industry has lost $1.7 billion to hacks and scams. Out of this $1.7 billion, $670 million was lost in the first three months of 2018 alone.
While the cryptocurrency industry is littered with fraud and Ponzi schemes, a number of cryptocurrency companies are keen on repairing this image. In the last few months, two new self-regulatory bodies have emerged. One of them is the Virtual Commodity Association (VCA), a body formed by cryptocurrency exchanges Gemini, Bitstamp, Bittrex, and bitFlyer USA.
According to a press release, the VCA will oversee virtual commodity marketplaces and establish rules and frameworks for industry best practices. While many in the cryptocurrency community applaud the VCA for its efforts and initiative, legal experts have, however, expressed great uncertainty with the body and believe that it may not generate very effective results.
Self-Regulation May Not Be the Answer
Joseph Moreno, a partner from the Cadwalader’s White Collar Defense and Investigations Group, is, however, very skeptical of self-regulatory bodies like the VCA since they’re not backed by a specific regulatory entity. Said Moreno:
“There’s no teeth in an SRO if there’s not a regulatory body behind it. It doesn’t look to be very effective without statutory authority. Presumably, it will set standards and have the power to eject members if they violate them, but it will not have any governmental-like regulatory authority to bring enforcement actions or levy fees.”
Moreno questioned the VCA’s effectiveness. He compared the VCA with the Financial Industry Regulatory Authority (FIRA). While FIRA is a self-governing body, it is, however, authorized by the American government and is under the supervision of the Securities and Exchange Commission (SEC).
Phil Lookadoo, a partner at international corporate law firm Haynes Boone, agreed with Moreno. He also expressed uncertainty and doubt when it comes to the idea of self-regulation and whether it is the best approach for the cryptocurrency industry.
Self-regulation, however, raises a lot of questions when it comes to cryptocurrencies. For example, the cryptocurrency and blockchain community tends to go against the idea of centralization and is a large supporter of decentralization. Decentralization is a key feature of blockchain networks as the idea is to remove centralized intermediaries as a point of power and authority. Self-regulation defies decentralization.
Lack of Transparency Prevents Institutional Investors From Entering the Market
While there are many benefits to self-regulation, Business Insider believes that the recent emergence of self-regulatory bodies could be an attempt from companies to make themselves and the industry appear more attractive to institutional investors.
SEC has been extremely hesitant and has not yet approved a Bitcoin ETF, and large Wall Street funds have also not joined the cryptocurrency market. With the lack of safeguard, low levels of transparency, and high levels of fraud, hacks, and Ponzi schemes, stronger and more robust regulations will most likely encourage institutional investors to enter the market.
It’s uncertain whether a self-regulatory body will help improve the existing problems in the market and push the market to a point of maturity. Nevertheless, self-regulatory bodies serve as a great reminder to regulators of the importance of regulations for the growing cryptocurrency industry.