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Self-Regulation Needs to Stabilise the Cryptocurrency Market

 5 min read / 

Cryptocurrencies have taken the world by storm. They’re working their way into industries of all kinds and changing the way that many do business. As cryptocurrency markets around the world continue to mature into mainstream financial exchanges though, there has been no shortage of growing pains. There have been instances of fraud, market irregularities, and thefts by hackers that have spooked investors around the globe. The risks of such incidents are now forcing the cryptocurrency market as a whole to come face to face with a concept that remains anathema to many early adopters – regulation.

From the earliest days of Bitcoin, the original cryptocurrency, the objective was to provide a secure, decentralised, trustless form of monetary exchange. The very nature of the idea would seem to preclude any need for external intervention to regulate the system. Unfortunately, the reality of cryptocurrencies has not quite lived up to those lofty goals.

Now, as government regulators around the world cast a wary eye towards the market, industry insiders are beginning to look towards self-regulation as a means of staving off any unwelcome external controls. The question is, how will the crypto-industry develop a functional internal regulatory system, and will it be enough to stabilize the markets in the long term?

An Initial Proposal

The task of creating a system of self-regulation within the global cryptocurrency market is not a simple undertaking. At the time of publication, there were already at least 1559 individually traded cryptocurrencies, available via thousands of individual markets. Those markets aren’t linked by any existing institutional means, which means that any self-regulatory scheme is going to require the creation of an entirely new intra-exchange entity.

Tyler and Cameron Winklevoss, two of Bitcoin’s early investors and founders of the digital-currency exchange Gemini have proposed the creation of an industry association designed to create a regulatory framework for the global market. It is called the Virtual Commodity Association (VCA), and the proposal includes a detailed explanation of the intended functions of the group, explaining that

The promise of virtual commodities and their impact on the future will be profound — but individuals and institutions need to feel safe and secure when transacting. We believe a thoughtful SRO framework that provides a virtual commodity regulatory program for the virtual commodity industry is the next logical step in the maturation of this market.

Regulators Send Signals

Although government regulators around the world have been starting to probe cryptocurrency markets, in the US there have been some recent signs that would seem to encourage the establishment of self-regulation within the industry. Recently, Brian Quintenz, a commissioner of the US Commodity Futures Trading Commission (CFTC) spoke about the cryptocurrency markets during an appearance on CNBC, commenting that it would “behoove investors” to create an industry solution like the VCA before the US Congress decides to step in.

Quintenz’s comments may have been nothing more than some sage advice from a veteran of traditional financial markets. They could also have been a veiled warning that the cryptocurrency industry is running out of time to create a viable internal regulatory solution. If the latter is true, the industry may be facing an upcoming upheaval. As a hub of global financial activity, any concrete regulatory action taken by the U.S. government in the cryptocurrency markets would become the de facto global standard that other nations would be sure to follow.

The Long View

At this stage, there’s no way to tell if industry insiders will be able to institute a regulatory framework that is sufficiently stringent and transparent to stave off governmental intervention. The details of the proposal to create the VCA envision an organisation that should meet the necessary standard, but it is still unclear when it will materialize. If it does, it wouldn’t be without precedent.

In the securities industry, the Financial Industry Regulatory Authority (FINRA) provides a perfect example for the cryptocurrency market to follow. As one of the largest self-regulatory organisations (SRO) in the US financial system, it has been successful in its purpose for many years and performs many of the functions called for in the Winklevoss proposal. A system similar to FINRA wouldn’t eliminate government regulation but may help to mitigate some of the more restrictive potential outcomes.

The bottom line is that self-regulation is a perfectly plausible way for the cryptocurrency industry to achieve long-term stability. It will require a broad consensus among stakeholders worldwide to achieve it, but that is not an impossible task. It is a task that must be completed soon, though, or the cryptocurrency market may find that it has squandered the chance to avoid a far more burdensome regulatory system imposed by outsiders.

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