Could Reasonable Crypto Asset Regulation Actually Benefit the Ecosystem?
I believe the benefits outweigh the costs. Here’s why.
The purpose of this article is to convince you, the crypto asset community, that, if done properly, the right regulatory structure for crypto assets would be a net benefit for the field. I am currently raising a small amount of funding from people that want to be a part of the formation of one such non-profit Self Regulatory Organization (SRO). I believe the time is now to get going on this, and I am willing to put in the time and effort to organize and launch this organization. However, I can’t do it alone.
In terms of convincing people that regulation could actually be good for them, I know I have my work cut out for me here. This is especially true in the cypherpunk realm of cryptocurrency. No one wants to be regulated. I wholeheartedly agree with this, having seen first-hand the deleterious economic effects of excessive regulation. However, please take a few minutes with an open mind to consider the concept I describe, which is a very different approach to traditional regulation.
The Situation Today
Right now, in 2018, the crypto asset field on a global basis is not in a good place. As a transformative technology that will change the world, crypto assets are earning a bad rap. This has manifested itself in a multitude of ways:
- Banks are increasingly limiting crypto/fiat exchanges, in some cases even closing accounts with all crypto related businesses. I read a case of a blockchain company (not crypto at all) being shut out of their banking relationship.
- Large platforms such as Google, Twitter, and Facebook are banning advertising of bitcoin, crypto assets, and ICO/ITO related products and services.
- Regulators all over the world are tightening the screws on crypto asset businesses, making it very hard to build adoption.
- Regulators are also applying legal requirements unequally to different types of crypto assets, and each regulator seems to have their own definition of what crypto assets are, shockingly defined to be — you guessed it — within their regulatory scope.
- In order to be a fiat/crypto conversion service, you must comply with the money transmitter requirements of nearly every state. This creates a very high bar to entry for businesses, which slows innovation and reduces competitive forces.
- Consumers don’t know what to make of crypto assets. Broad-based education to consumers is limited.
- Know Your Customer and Anti-Money Laundering measures are enforced unevenly, giving a bad reputation to good projects, as well as opening the door for tougher regulations.
- Fraud in the field is widespread, with heavily pre-mined currencies, ICOs that disappear overnight (with investors funds), and false claims being made all over the space.
- Poor code — in node daemons, smart contracts, wallets, and exchanges — has led to the loss or theft of hundreds of millions of dollars.
- The success or failure of many offerings is increasingly based on marketing power, rather than technical or business merit.
In short, in many ways, the current crypto asset ecosystem is giving regulators plenty of legitimate concerns to worry about. If your mission was to protect investors, wouldn’t you be concerned about all of the above? I know I would.
Addressing the Problem
Some in the crypto asset community believe that investors are to blame for their loss of funds, and in some ways I agree with that assessment. However, even the smartest investor can be deceived. There is no replacement for doing your own research, of course. However, the many types of fraud, coding issues, regulatory burdens, and disrepute (as evidenced by advertising bans) are and will continue to inflict damage to the good actors, instead of only the bad. Regulators will continue to do their job to protect investors, but in so doing, the risk is very real that they will harm or create unreasonable burdens on innocent projects.
I believe that the best approach to handle this situation is the creation of Self Regulatory Organizations (SROs), which are entities such as FINRA (the Financial Industry Regulatory Authority) that are “self-policing” organizations and are recognized by regulators in that capacity. Recently, Gemini blogged about their proposal to create one SRO which they’ve named the Virtual Commodity Association (VCA). I support this effort and in this article I propose the creation of another SRO.
Self Regulatory Organizations for the Crypto Asset Industry
A few months ago, I was strongly advocating for best-practices, voluntary standards that could be used by anyone in their projects to reduce fraud and enhance confidence. I proposed this through my organization, Blockchain Technology Research Innovations Corporation, which is a 501(c)(3) non-profit economic development organization. Because of the rapid evolution of regulations, the negative actions taken against the crypto asset industry by organizations such as banks (closing accounts) and advertising platforms (banning crypto asset ads), I propose to move that work and build upon it into an industry-supported, non-profit SRO.
To achieve this, BTRIC is collecting tax-deductible (disclaimer: talk to your tax advisor) contributions that we will grant towards the creation and initial operations of an SRO, the working name of which is the Financial Technology Self Regulatory Organization (FTSRO).
In several ways FTSRO will be similar to the VCA, and I hope we are able to work together cooperatively in these areas. However, we strongly believe that there should be multiple SROs, not just one or two. Imagine Visa if there was no Mastercard? Or American Express? Or Discover? Alternatives keep everyone honest and prevent exclusionary organizations. FTSRO is focused on being inclusive, not exclusive.
- Membership open to people, businesses, and decentralized, non-entity projects (such as the Bitcoin Project) that deal in crypto assets of all types, including but not limited to cryptocurrency. By including a wider scope of membership, FTSRO will participate with multiple different regulatory bodies, instead of a singular focus on virtual commodities. FTSRO will seek and build cooperative relationships with CFTC, SEC, Treasury’s OFAC, IRS, state regulators, and associations of state regulators (that often develop shared model frameworks).
- Ensure that the cost of compliance with any requirements of FTSRO (and, to the extent we’re able, regulatory requirements) is reasonable and does not serve to be a burden that limits innovation and new entry in a field that has so much future growth. After all, if the cost of compliance with an ICO/ITO is nearly that of an IPO, why not just list on a stock exchange? The cost of compliance with FTSRO membership, accreditation, and regulatory requirements — even those for securities tokens — should be a fraction of that cost.
- Develop accreditation programs for individuals in their competencies, similar to the work being done by the CryptoCurrency Certification Consortium. At the end of the day, we need a pool of professionals with competencies in blockchain code development and evaluation, security auditor, crypto asset classification, ICO/ITO rating and due diligence, crypto asset funds management, and other important functions. To reduce fraud, consumers need to be able to know the difference between a true crypto asset professional and someone that just talks a good game. These accreditations should not be expensive nor overly burdensome. Those that are already experts should be able to easily receive accreditations.
- Develop cooperative programs between members to ease the burdens of compliance with regulatory requirements. By developing cooperative pools, cost savings and efficiencies can be gained in those areas where it makes sense:
- Cooperative KYC/AML/CFT programs that better protect consumers and eases burdens on businesses;
- Best practices frameworks for code evaluation, security audits, incident response and harm mitigation, blockchain resilience, etc.;
- Crypto asset classification (Determine the legal status of a given crypto asset, such as: currency/virtual commodity, utility token, securities token, collectible, insurance token, etc.);
- Best practices frameworks for ICO/ITO evaluation and due diligence, building on work such as Spacesuit X;
- Best practices frameworks for financial and operational security; and
- Promote the creation of industry-funded investor protection initiatives, such as a Securities Investor Protection Corporation (SIPC) focused on crypto assets.
- In addition to liaison and advocacy to policymakers, implement educational outreach programs intended on informing businesses (such as those currently banning advertisements as well as businesses that could benefit from crypto asset adoption), investors, and consumers about the benefits of crypto assets.
- Other outreach and educational programs can be focused towards educators, ensuring that software engineers, financial professionals, and others are educated about crypto assets. As the field grows, we will need more crypto asset professionals to support projects, products, and services.
- Organize initiatives and programs that have yet to be conceived, keeping up with innovation as the field rapidly evolves.
Benefits to the Crypto Asset Industry
- U.S. citizens should not be precluded from participating in ICO/ITOs around the world because the projects have decided that compliance with U.S. standards is overly burdensome. We can streamline compliance with current regulations, as well as promote further streamlining to lawmakers.
- Legitimate projects should not decide to incorporate and operate in other countries because the U.S. makes it hard to compete. We can ensure that the United States promotes — not prohibits — innovation in our industry. The U.S. should lead the world in building the projects, products, and services that reshape the global economy.
- Fraudulent projects must be reduced to the extent possible so that promotion, advertising, and adoption of non-fraudulent crypto assets is not slowed. Good projects should be able to be separated from the bad, without expensive or unreasonable regulatory compliance burdens.
Support the Formation of FTSRO
What began as a cypherpunk movement by Satoshi Nakomoto has grown into something bigger: the realization of a restructuring of how financial markets and economic systems operate. To support this continued growth, some self-policing will provide protection against fraud and increase consumer and investor confidence, which will ultimately enhance adoption.
Support the formation of the Financial Technology Self Regulatory Organization by making a contribution toward this purpose to BTRIC. We have established a separate fund to collect contributions towards the formation and organization of FTSRO. Once the organization is formed, we will donate these funds to it. We have also secured the ftsro.org domain name (currently parked), which we will also donate to the organization. We are actively seeking people that want to be part of this organization as a member of its Board or through involvement in the committees that develop and maintain the standards listed.
- FTSRO Fund — Bitcoin: 3DEUz5roLXYuGZjnA7zyvXZHy7aFMErBqx
- FTSRO Fund — Ethereum: 0xe7f80b303f10d8bce4e25083c66f12bbe44ebaa3
- For a receipt to acknowledge your contribution, which is tax deductible to the extent allowed by law (consult your tax advisor), please send an email, signed with the sending address, to email@example.com.
- To make contributions in other cryptocurrencies and/or fiat contributions, please email firstname.lastname@example.org and we will take care of it.
Though I know many are opposed to regulations on crypto assets in general, that is not a practical reality in today’s world. Congress has decided that investors and consumers deserve protection, and I agree with that. Carefully designed self-regulatory organizations, such as FTSRO, provide a way to balance the need to be as “light-touch” and inclusive as possible with the important needs of reducing fraud and protecting consumers. In addition, SROs can advance educational and other initiatives that benefit the industry as a whole.
An SRO allows the industry to, in many ways, police itself, which many have discussed the need to do. This proposal provides a framework to moving that forward and I look forward to working with all to form and operate this organization with careful consideration of the issues and values that embody the crypto asset community.
Please reach out to me if you would like to discuss this further. I can be reached on Telegram at https://t.me/BTRICorg.