For more than a decade, cryptocurrency has been referred to by some as a digital “Wild West.” Those who use that terminology refer to the lack of regulation that applies to the crypto space. They are also typically implying that wandering into the realm of crypto is risky, if not dangerous.
Often it is regulators who choose the term to label cryptocurrency. Gary Gensler, Chairman of the US Securities and Exchange Commission, used the term in January 2023 while providing financial advice to those serving in the US military. He warned that most cryptocurrencies are operating outside of the law.
While regulators and lawmakers are often the most vocal crypto critics, they are not the only ones with complaints. Crypto companies have also become increasingly frustrated with the lack of decisive action, especially by the US government, in relation to crypto regulations. Overall, they desire the clarity that regulations would bring in terms of what it means to operate responsibly.
A Complement to Government Regulations
Some in the crypto industry have understood for a while now that government alone may not be the best answer to the question of who should regulate crypto. They have embraced an alternative option that complements right-sized government regulation and has the potential to inspire responsible growth in the industry: self-regulation.
Why self-regulation? Because those within the industry, who engage with the crypto ecosystem daily, are the ones who have the expertise, skill, and understanding necessary to develop and deploy effective controls. They are the ones who can shape the industry in a way that provides consumer protection and market integrity without sacrificing innovation and profitability.
The Role of SROs in Industry Growth
In general, self-regulatory organizations (SROs) are established to develop and enforce standards that promote ethical and professional conduct. They identify best practices and train their industries on how to apply those practices. They can also set rules governing the behavior of their members, then discipline those who violate those rules.
The Financial Industry Regulatory Authority (FINRA), which oversees broker-dealers, is an example of an SRO. It works under the supervision of the Securities and Exchange Commission to educate the industry, examine their operations, and enforce its rules. Its mission is “to protect investors and promote market integrity.”
The Function of Self-Regulation in the Crypto Space
Defining quality is one of the primary functions that self-regulation brings to crypto. Ambiguity, complexity, volatility, and uncertainty are hallmarks of the crypto space, making it extremely challenging to define what it means to provide a quality product or service. In lieu of regulations that define industry standards, SROs provide a measure by which members’ operations and products can be evaluated.
For example, providing quality in the crypto space, just like in any other industry, requires strong governance and a system of checks and balances to protect against corporate abuse. What are the minimums those systems should include? On what should a board of directors focus? What type of expertise should be represented on that board or in its meetings? What types of business activities should constitute a conflict of interest? These are among the factors that self-regulation must address in order to define what organizations should be considered quality crypto providers.
Once quality is defined, SROs will further serve the crypto industry by evaluating organizations for adherence to quality standards. This involves proactive measures aimed at identifying and addressing potential compliance risks. In essence, the goal of assessing quality is to prevent issues from becoming problems.
Where government regulations apply, assessing quality involves monitoring compliance with those regulations. But self-assessment goes beyond that to identify emerging risks not covered by regulatory frameworks and to mitigate those risks by developing effective policies and procedures. In the crypto space, self-regulation provides the best option for keeping up with the ongoing and fast-moving development of crypto and other blockchain-based assets.
For example, crypto companies should have risk management systems in place that are appropriate based on the nature of their business and the size of their operations. SROs can provide oversight that not only ensures systems are in place but also ensures that systems are sufficient based on the latest development in the field. They can also advise organizations on how systems should evolve as their business grows.
Self-regulation also supports the continuous efforts to improve the quality of crypto products. This is one area in which the benefits of self-regulation can easily be seen. Whereas government regulators tend to focus primarily on protecting consumers and markets, self-regulation can also foster healthy industry growth. The oversight that SROs provide identifies and addresses weaknesses while also revealing how and where best practices can improve the overall strength and reputation of the organization.
Finally, self-regulation raises awareness of quality organizations and the contributions they are making to the industry as a whole. News reports on crypto are dominated by stories focused on irresponsible actors. SROs play an important role in developing a narrative that focuses on organizations committed to a level of quality, innovation, and improvement that supports the public interest as well as the industry.
The Impact of Self-Regulation on Crypto’s Continuing Development
Self-regulation supports the type of collaboration with regulators and lawmakers that is critical for ongoing innovation in the crypto industry. While there are a number of regulations in place in the US that affect the crypto industry, none have yet been issued that were designed to specifically address its complexities. Applying regulations to crypto that were drafted decades before its creation promises to threaten its future development. By working together with industry experts who have committed to self-regulation, government agencies can ensure that regulatory efforts serve all stakeholders.
The crypto landscape is littered with companies that failed to provide quality and consequently failed. Some outlets report more than 3,000 coins that failed in 2021 alone. Many of those failures resulted in not only a loss to investors, but also damage to the industry’s overall reputation. Self-regulation allows consumers and investors to identify those companies that have made quantifiable commitments to quality, forcing all those who want to participate to comply with best practices.
As crypto-focused SROs do their work, they pave the way for the market to support organizations that contribute to a strong, dynamic, and globally competitive industry. As a result, crypto becomes an industry that can drive economic growth and job creation while fostering revolutionary financial inclusion.
Gabriella Kusz is the CEO of the Global Digital Asset and Cryptocurrency Association, a global voluntary self-regulatory association for the digital asset and cryptocurrency industry. Global DCA was established to guide the evolution of digital assets, cryptocurrencies, and the underlying blockchain technology.