The Wall Street Blockchain Alliance (WSBA) has published a set of “Crypto Industry Principles” that are described as “foundational statements of best practices” for the digital asset sector. WSBA is a non-profit advocacy group that supports the utilization of blockchain technology in financial markets. The group believes this technology will result in new asset classes, cost-effective solutions, and greater value and wealth creation.
As we all know, 2022/2023 has not been kind to the digital asset sector as crypto has been blasted with multiple failures, enforcement actions, allegations of fraud, and, most prominently, the collapse of FTX with criminal charges pending. If optics are everything, things are not looking good for crypto.
The WSBA’s “living document” believes it is necessary to craft industry guidelines for the tech to develop and be accepted broadly across financial services.
The “General Principles” are as follows:
- Adopt and apply high standards of conduct and principled policies when dealing with customers.
- Segregate customer assets from the enterprises’ and related entities’ own assets.
- Provide customers with continuous access to their account information.
- Pursue self-regulation and promote industry standards so that customers receive an equivalent measure of protection associated with those regulated activities most closely aligned with the equivalent promoted activities.
- Enforce prudent AML/KYC and CIP policies, and prohibit self-dealing, front running, wash trading, and other manipulative practices, as applicable.
- Understand that the Crypto Industry Principles are foundational and may apply differently to different industry participants based on the manner in which such participants operate in the space. The intent is to elevate overall conduct, efficacy, safety, and transparency for all market participants, particularly in instances in which regulatory oversight does not currently apply.
A segment also outlines customer rights, providing common sense recommendations and additional guidelines.
CI connected with Ron Quaranta, Chairman of the WSBA, with several questions following the release of the Principles. We asked Quaranta if these principles are supported by large industry participants or if this is an effort for WSBA to provide leadership for the blockchain sector.
“The WSBA has several large traditional finance firms as well as large cryptoasset firms, and all have been supportive of our efforts here,” said Quaranta. “We are attempting to provide a level of leadership, but in our minds this is an outreach to the entire industry to collaborate and represent a “voice of industry” to offer a principle based approach to operating in crypto. This will ultimately help us realize the best benefits of cryptoassets and blockchain, while developing an ecosystem that is compliant with relevant regulations and customer protections.”
Asked about crypto platforms (or VASPs) outside the US and their support, Quaranta said they are initially focused on the United States, but the document will evolve, and they welcome the participation of all industry stakeholders.
As part of the discussion revolves around whether or not digital assets are securities, commodities, or something else, we inquired as to WSBA’s position on this debate.
“As a not-for-profit trade association, our members have a pretty diverse series of opinions on this debate,” Quaranta explained. “That said, I think that regulatory clarity would be beneficial, and also believe that the only real solution will be some type of legislation down the road that promotes innovation and US engagement in the digital asset space.”
So are bespoke regulations need for digital securities – or digital asset securities – for this sector to develop and grow? And should we be reviewing the rules that the European Union has proposed?
“The WSBA has members across a wide variety of industry verticals, many of which have different views on this topic. That said, I personally think that this is an opportunity to evolve regulations in a way that promotes innovation while protecting market integrity, investors and customers, etc. Given the progress happening in the EU and Asia, I think it would only be sensible to study the approaches that those regions have taken.”
Asked about which regulator should have oversight over digital assets – or whether it is multiple regulators or an entirely new government entity, Quaranta said that is a tough question. He said the answer to that comes down to the outcome of pending court cases and any legislation that may be passed in the future.
“Multiple regulators defining the same thing (cryptoassets for example) in different ways, only serves to confuse the market place, harm legitimate investors and customers, and erode the ability of the US to compete globally.”
Another difficult issue is DeFi or decentralized finance. Many industry insiders are staunch advocates of DeFi, while other pundits believe it is a myth.
Quaranta said they haven’t specifically noted DeFi in their Crypto Principles Initiative, but they are clearly aware and believe that many of the principles that they have noted can apply to DeFi as well.
“That said, this is an evolving document and we look forward to participation across all industry stakeholders, including those at the intersection of DeFi.”
In recent days, most of the discourse on financial services have been about the stress in the traditional banking system. We asked Quaranta about his thoughts on the ongoing crisis, and he said that, in his opinion, crypto has been unfairly targeted as a “trigger” for the current banking crisis, while the evidence seems to indicate that overall poor risk management, something that existed long before crypto, is the main catalyst.
“I believe that DLT capabilities could represent a way to “systematize” risk management for banking, as well as other industries, but given the current state of affairs it may be some time before that can be realized.”
The WSBA Crypto Principles are available here.