Self-Regulating Digital Currency Is a Great Idea—If It’s Done Right

A visual representation of Bitcoin.

A visual representation of Bitcoin. Dan Kitwood/Getty Images

The wild, wild west of digital cryptocurrency trading, and use, is getting a little less wild as this technology becomes more widely used.  Right now, there is an explosion of this newer alternative currency to the dollar.  If you have heard of Bitcoin and the controversy surrounding its revolutionary new way to transact business, then you know a little about a business model that has exploded over the past few years.

In layman’s terms, and explained in a post on Coin telegraph titled What is Cryptocurrency. Guide for Beginners, “a cryptocurrency is a digital or virtual currency designed to work as a medium of exchange. It uses cryptography to secure and verify transactions, as well as to control the creation of new units of a particular cryptocurrency. Essentially, cryptocurrencies are limited entries in a database that no one can change unless specific conditions are fulfilled.” Most companies roll out an initial coin offering (ICO) to sell off a set number of digital coins; then, they are traded as a means to establish a value for each digital coin.

Bitcoin has been used to purchase a pizza and homes—it has problems, yet was the revolutionary that was the first to be successful in providing consumers with an alternative to paper money, credit cards and traditional banking.

One issue that looms over the business model is the proper way to regulate the use and transfer of this volatile and ground-breaking technology to protect consumers. Self-regulation by industry leaders is one way to avoid having the government regulate the new technology. Experts who are working in the industry are subject matter experts who know best practices and can roll out standards for digital currency trading and use that will make sense and provide less pressure on governments to get into the business of regulating a new technology that not many in government understand.

The government has zero understanding of how this revolutionary means to transact business can be an engine to spur economic growth and provide peer-to-peer transactions—cutting out banks. Some in the government see the new digital currencies as a competitive instrument the dollar. Furthermore, many in government are so close to the banking community, and they will help banking interests to use government power to stamp out competition.

The federal government may eventually set up a regulatory scheme, but the idea that the industry is setting up a self-regulatory process is a great one—but there are concerns with a new self-regulatory organization (SRO) recently announced to police the cryptocurrency space.

According to Investopedia, “as the term suggests, an SRO regulates itself. It also has some regulatory influence over an industry or profession, and that influence or authority could replace government regulation or be an addition to government regulation. The ability of an SRO to exercise regulatory authority does not derive from a grant of authority from the government. SROs often accomplish this through internal mechanisms that control the flow of business operations or through an external agreement between like businesses.”

The push for an SRO will help give emerging new digital currencies and consumers some confidence that the new companies are legitimate and will establish industry wide best practices to provide confidence in digital currency as a legitimate new currency.

Some initial coin offerings, where a company sells off the new tokens or digital coins, have been fraudulent. The people in the industry have the knowledge to self-regulate and to weed out bad actors, much like the American Bar Association self-polices the law profession.

There is a new interesting effort by a non-profit called the Virtual Commodity Association (VCA) to set up an SRO. Bloomberg reported on August 20, “Several of the world’s largest digital exchanges joined an effort to root out bad behavior in the $214 billion cryptocurrency industry. Created by Gemini Trust co-founders Cameron and Tyler Winklevoss, the Virtual Commodity Association expanded its roster of exchange participants to include Bitstamp, BitFlyer USA and Bittrex, according to a statementMonday.”

This development was met with optimism by U.S. Commodity Trading Futures Commissioner Brian Quintenz who stated “an independent and empowered SRO-like entity could have a meaningful impact on the integrity and credibility of this young marketplace.”

The idea of an SRO for digital currencies is a good one.

However, there are some concerns that this new SRO needs to expand and avoid cronyism to protect only the large members of this new organization. The Winkelvoss twins are running the VCA and are saying all the right things, yet they are heavily invested in one of the most problematic cryptocurrencies—Bitcoin. Members of the new VCA include bitFlyer, Bitstamp, Bittrex and Gemeni, owned by the Winelvoss twins. BitFlyer is Japan’s largest cryptocurrency exchange and was recently accused of violating anti-money laundering regulations. Bitstamp was hacked to the tune of $5 million worth of bitcoin in 2015. Bittrex has also been accused of allowing fraudulent coins to be traded directly to the consumer. Gemeni recently started trading ZCash, which is a digital currency specifically designed to obscure transactions and prevent observation of the flow of funds.

The practices of the companies controlling the VCA have helped created the need for SROs, because they did not always abide by the practices they are promoting today. The hope is that these dominant players in the cryptocurrency exchange space will be inclusive and allow some of the smaller exchanges to participate to avoid cronyism and favoritism for the member corporations.

Self-regulation could work, but it will only work if SROs like the VCA don’t set a bad example. If this organization becomes a means to use the power of self-regulation to protect these large players, then the effort will be a failure and will further taint the whole cryptocurrency effort. If this organization becomes inclusive and allows ethical new and smaller exchanges to significantly participate in the regulatory process, then it could be a vehicle to avoid harmful federal regulations.

Brian Darling is the former senior communications director and counsel for Sen. Rand Paul (R-KY).

Self-Regulating Digital Currency Is a Great Idea—If It’s Done Right