Virtual Currency Association looking for ways to self-regulate crypto industry

Gemini founders Tyler and Cameron
Winklevoss.
AP
Images

• In a desire to shed more light on the notoriously
  opaque crypto industry, some crypto firms are teaming up to
  improve the market’s reputation.
• One group, the Virtual Commodity Association working
  group, aims to set up a self-regulatory group for the crypto
  industry. But its practicality has been questioned by law
  experts for a number of reasons.

Interest among big Wall Street firms in the cryptocurrency market
is growing, but the nascent industry is still plagued by
fraud and fettered by regulatory uncertainty. In the second
quarter of 2018, investors lost
$670 million in cryptocurrencies in hacks and scams. 

In response, a number of cryptocurrency firms are teaming up to
try and to repair the industry’s image and push for regulatory
clarifications. 

Two new groups have emerged in recent weeks in an attempt to make
their voices heard and to shine more light into the notoriously
opaque and volatile market. 

One, called the Virtual Commodity Association (VCA) working
group, is the industry’s first self-regulatory organization
and was
launched by the Winklevoss brothers’ Gemini exchange, Bitstamp,
bitFlyer USA, and Bittrex in August. 

In the absence of regulatory oversight, crypto exchanges are
looking for ways to self-regulate the industry to make themselves
more attractive to institutional investors. Lack of transparency
and lack of safeguards in the crypto market is also cited as a
reason
why the SEC hasn’t yet approved a bitcoin ETF. 

Many big Wall Street funds have been loath to enter the
crypto market because
of the potential for hacks and fraud.

But while some market observers say that the establishment of the
Virtual Commodity Association is a necessary step for the nascent
crypto market to mature, skeptics say it likely won’t accomplish
much. 

Joseph
Moreno, a partner in Cadwalader’s White
Collar Defense and Investigations Group, said the idea of a
self-regulatory organization — like the Gemini-led venture — may
not be very effective.

“There’s no teeth in an SRO if there’s not a regulatory body
behind it,” he said. “It doesn’t look to be very effective
without statutory authority.”

Moreno contrasted the self-regulating nature of the Virtual
Commodity Association with that of the Financial Industry
Regulatory Authority, another self-governing body which is
authorized by Congress and supervised by the Securities and
Exchange Commission. 

“Presumably, [the VCA] 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 fines,” he said. 

The SRO proposed by the Gemini group will be governed by “a
board of directors and capitalized by members,” and it will 
“not operate any markets,” “not be a trade association,” will not
provide regulatory programs for security tokens or security token
platforms,” as indicated by VCA on its website. 

“I don’t know that self-regulating is exactly a recipe for
avoiding problems, “said Phil Lookadoo, a regulatory and
transaction partner at Haynes and Boone, LLP. 

A spokesperson from the VCA could not be reached for
comment. 

In addition, not everyone in the crypto world may welcome a
self-regulatory group, which goes against the concept of
decentralization — a critical feature offered by blockchain
technology. 

“Part of the charm and fascination of blockchain is its ability
to take out central intermediaries,” Moreno said. “Within the
community, there is a direct natural bias against centralization
and giving power over to the central authority.”

Another group, the Blockchain Association lobbying group, has a
different mission. It’s composed of crypto companies like
Coinbase, Circle, Digital Currency Group, Polychain Capital,
Protocol Labs, and Zcash, and works on topics like tax
treatment of tokens and consumer protection.

These organizations are springing up
as enforcement actions against crypto firms are starting to
emerge.

In September, the
SEC and the FINRA issued a string of actions against
companies that have been involved with cryptocurrencies, in the
first major attempts to regulate the industry.

The New York Attorney General office also published
a report calling into question a set of practices undertaken
by crypto exchanges, noting that a number of them failed to
implement serious efforts to monitor and stop manipulative
trading.