Revolutions often happen in evolutionary ways. Ten years after the publication of the Bitcoin whitepaper, the world is still coming to terms with its implications. The rise of digital assets heralds significant opportunities and poses significant challenges to government regulators. Because these digital assets do not fit neatly into existing regulatory buckets — currency, personal property, securities or commodities — but rather span all of them in interesting ways, and because of the natural tendency for regulation to lag innovation, there remains no clear roadmap for how existing rules apply and what, if any, new rules are needed to create fair and orderly markets for digital assets. At best, the regulatory void creates confusion and ambiguity; at worst, it begets fraud, deters institutional investment and participation, and, in the aggregate, hinders the material benefits of distributed ledger technology for purposes that go well beyond finance. If the potential of digital assets is to be realized, rules must be clarified, compliance must be monitored, and enforcement mechanisms must be built to protect investors and consumers while encouraging the responsible development of digital asset markets.
But these rules need not exclusively come from governments. Many of the standards governing market conduct have arisen from market participants themselves and evolved over the years. The industry wrote rules leveraging their expertise and tailored them to the needs of the specific market. This allowed well-informed regulation to be achieved at a relatively low cost. This self-governing approach has been the centerpiece of the regulation of stock brokers since the 18th Century. In the absence of government regulation, stock brokers created their own regulatory body to set standards and police behavior of market participants. The end result was the creation of trust that permitted liquid capital markets to arise and flourish.
II. Association for Digital Asset Markets (ADAM)
Institutional market participants have both the responsibility and the opportunity to develop and codify an infrastructure that advances the long-term interest of the market. This is the mission of ADAM: to foster fair and orderly digital asset markets.
Derivative of that mission, ADAM has four overarching objectives:
(1) To protect all market participants from fraud and manipulation;
(2) To provide clear rules and standards for efficient trading, custody, clearing and settlement of digital assets;
(3) To encourage professionalism and ethical conduct by all market participants; and
(4) To increase transparency and provide information to the public and governments about digital asset markets.
III. Code of Conduct
Achieving these goals requires some agreed-upon rules — namely, a Code of Conduct developed by a consensus of market participants. This Code must set a high standard for conduct across a broad range of digital asset market products and services including but not limited to: issuance, trading, custody of assets, clearing and settlement protocols, disclosure requirements, conflicts of interest, transparent and trusted price formation, security, and licensing.
The ADAM Code of Conduct must represent the consensus of the digital asset ecosystem, including those institutions not currently active in the market. The Code must build on longstanding precedent and applicable law. It must clarify existing law — without contravening it — to be applicable to an asset class that was not envisioned when those laws were drafted. And it must leverage the capabilities of the blockchain to build compliance functions into the code itself, without undue interference. The Code must also account for the international nature of digital assets.
ADAM is not an alternative to regulation nor a substitute, but a complement that should serve to inform regulators and lawmakers if and when regulations are promulgated.
The Code of Conduct will be proffered by ADAM members and advisors for the benefit of institutional digital asset market participants and regulators. The governance necessary to cultivate consensus is currently being developed with the help of distinguished former regulators, lawyers, academics, and industry professionals (collectively, the ADAM Advisory Board). This process will take time, it will require member firms to subordinate their immediate self-interest for their long-term interests and the mutual interest of the ecosystem.
Admittedly, this is not an altruistic endeavor but a practical one: what we stand to gain by cooperating to build an infrastructure that begets confidence is superior in every way to what we stand to lose by delaying these hard questions or risking an expansion of bad behaviors that invite suspicion, hinder progress, and prevent these markets from realizing their full potential.
IV. ADAM’s Members
Participation in ADAM is open to qualified organizations involved with the trading of digital assets, namely: marketplaces, investors, asset managers, traders, liquidity providers, consultant, brokers, and investment banks. Fundamentally, ADAM is about marrying technology with a set of agreed-upon rules to facilitate its adoption into safe and transparent markets. Participation from technologists and legal experts is essential to ensuring that the sum of ADAM’s efforts — namely, its code — balances these viewpoints.
To become a member and to maintain membership in ADAM, organizations must commit to ADAM’s Principles and bylaws.
Founding members of ADAM include:
- BitOoda, a digital asset advisory firm specializing in trade execution, market analysis, and structured products;
- BTIG, a global financial services firm specializing in institutional trading, investment banking, research and related brokerage services;
- Cumberland, a global leader in crypto assets, specializing in institutional-sized liquidity;
- Galaxy Digital, a diversified merchant bank dedicated to the digital assets and blockchain technology industry;
- Genesis Global Trading, one of the largest over-the-counter cryptocurrency dealers;
- GSR, a pioneer in electronic trading of digital assets, utilizing proprietary technology built in-house to provide liquidity solutions globally since 2013;
- Hudson River Trading, a leading global multi-asset quantitative trading firm;
- Paxos, the fintech company behind the Paxos Standard token (PAX) and itBit (the digital asset exchange with trading services including escrow, custody and OTC);
- Symbiont, a market-leading smart contracts platform for institutional applications of blockchain technology;
- XBTO, a provider of institutional liquidity to major trading platforms and one of the world’s largest and most diversified participants in the cryptocurrency markets.
In addition to its Board of Directors, ADAM will maintain an Advisory Board composed of scholars, legal experts, technologists and former regulators who will assist with drafting and administering the Code of Conduct.
V. ADAM’s Governance
ADAM will be a private 501(c)6 not-for-profit organization. Its members will elect a Board of Directors that will oversee the adoption of the Code of Conduct. All actions of ADAM will be made under the authority of the Board. The Board will consist of industry and independent members. The chairperson of the Board of Advisors may serve as the Chair of the Board of Directors.
The Board will establish committees, approve rules, seek consensus among Members and over time undertake measures and developing mechanisms to promote compliance.
The Board will appoint member firms and independent advisors to devise the Code in stages. Drafts will be distributed for public comment, the period and rules for which will be open for a predetermined period of time at the discretion of the Board.
The Board or its assigned designees will then amend the draft as appropriate and vote to adopt or amend the Code of Conduct. The Code of Conduct will be reviewed periodically and amended or updated as circumstances warrant.
To maintain efficient internal functions, the Board in its first year may form a Finance and Membership Committee to nominate and determine eligibility for prospective members and manage the organizations’ budget. The Board may also enlist a Governance Committee to set and maintain bylaws. As the membership grows, additional committees and subcommittees may be added as circumstances and efficiency permit.
Finally, ADAM will appoint one or more persons to serve as an investors’ advocate. The advocate will work closely with the rule-making, enforcement, and adjudicatory bodies, as well as with ADAM’s members and government regulators, to ensure that the interests of market participants are appropriately considered at all times.
VI. Scope of ADAM
A. Initial Stage: Draft a Code of Conduct
ADAM will first create and promulgate a Code of Conduct. The Code of Conduct will be developed through a deliberative process designed to draw broadly on the expertise of market participants, lawyers, former regulators, and technologists
ADAM will focus on creating a vibrant market in the U.S. that is efficient, compliant and that investors, traders and entrepreneurs can trust. However, given the nature of the market, ADAM intends to participate in and convene efforts to develop global standards applicable to digital asset markets across important jurisdictions.
As a new organization, ADAM will leverage any applicable existing case law, laws, rules and regulations decided or promulgated by such governmental, self-regulatory and other industry bodies as the Commodities Futures Trading Commission (CFTC), Securities Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA), National Futures Association (NFA), Securities Industry and Financial Markets Association (SIFMA), the International Swaps and Derivatives Association (ISDA), and other analogous global institutions.
ADAM’s code will seek to supply rules in areas listed below and will evolve as conditions necessitate:
· Market Integrity, Professionalism & Ethics
· Risk Management and Continuity
· Know Your Customer & Anti-Money Laundering
· Custody of Customer Assets
· Record Keeping, Supervision and Information Sharing
· Confirmation, Clearing & Settlement Guidelines
· Price Manipulation
· Cybersecurity and Customer Data Protection
It’s beyond the scope of this introductory document to predict what specific standards ADAM will commit itself to. That will be the result of a deliberative process resulting from the governance now being contemplated by ADAM’s Board and Advisory Board. What we can affirmatively say is that ADAM’s Code will strive in all places to comply with and be informed by applicable standing law and regulation. Where possible, ADAM will suggest technology solutions to efficiently maintain compliance functions.
B. Going Forward
Once Code is promulgated and adopted, ADAM will update the Code on an ongoing basis, paying close attention to the following three things:
(1) the dynamics of market behavior;
(2) technological change and innovation; and
(3) regulatory actions, both domestic and global.
ADAM will eschew rules for the sake of rules, rules that impede technological solutions that might arise for problems, and rules that favor the interests of one subset of market participants over another. Only when a clear case can be made that the markets for digital assets will be better off will a rule be adopted that binds ADAM members.
Over time, ADAM may take on a more active role in resolving disputes, disciplining members, promulgating licenses, and other practices of self-governing organizations. These additional activities will be undertaken only under the direction of the Board, and only if doing so advances the long-term best interests of the overall market.
The Association for Digital Asset Markets (ADAM) will exist to promulgate standards applicable to digital asset market participants. The effect of these rules will be to facilitate fair and orderly digital asset markets where participants can transact with confidence.
ADAM’s Code will be developed by its members with input from its Advisory Board, technologists, lawyers, academics and the public. Once developed and agreed to, adherence to the Code will be a condition of joining and sustaining membership in ADAM. The process by which ADAM develops its Code will be informed by leading former regulators, lawyers, technologists and academics to ensure compliance with applicable existing law and precedent. ADAM’s Code will take into consideration the special features, technological characteristics, and evolving nature of digital asset markets.
In all cases, ADAM’s Code will strive to be consistent with, and a complement to, existing law. Its immediate impact will be to help fill the void where no clear regulation exists for digital asset markets. Over time, its rules will come to represent the consensus of
market participants, providing government regulators with a potential roadmap. While ADAM’s immediate focus will be domestic, it will ultimately be part of the global conversations and strive to adapt its code to be practical to digital asset markets across multiple jurisdictions.
In one sense, what ADAM purports to do is not new: it follows in a long tradition of financial market actors and technology pioneers self-regulating to promote order and broad participation. What was true then and remains true in the context of digital asset markets, is that rules are not the enemy of innovation — they are necessary to preserving and enhancing the benefits we should all hope come from more efficient markets.