They all support developing rules to bolster the industry’s credibility and jettison its Wild West image, but there is no consensus on a path to get there, including on issues like creating a self-regulatory organization.
Chicago and New York have long battled for supremacy in financial markets. At stake now are billions of dollars in digital assets, such as bitcoin, and more participation in the industry, which has grown in popularity as the pandemic undercuts major economies and government currencies.
“Whenever everything shakes out, there will be one (regulatory organization) standing that’s probably cobbled together from the three or four initiatives that are out there, but for the time being, we are going to push forward with the mindset that (Chicago’s) is the one,” says Matt Lisle, general counsel at Chicago-based cryptocurrency lender Drawbridge Lending and one of the informal leaders of the Global Digital Asset & Cryptocurrency Association.
The Commodity Futures Trading Commission and Securities & Exchange Commission share authority to thwart fraud and manipulation in the cryptocurrency market, but they don’t have general regulatory oversight, except at CFTC-regulated exchanges. CFTC Commissioner Brian Quintenz has encouraged the industry to develop a self-regulatory organization, or SRO-like entity, similar to the Chicago-based National Futures Association, to fill that gap. That would bring more protections for consumers, he says. “I don’t think it’s a prerequisite to establishing market integrity, but it helps expedite it,” Quintenz says.
MORE THAN A FAD
Getting everyone on the same page won’t be easy. There are hundreds of cryptocurrencies, and they are decentralized by definition. The distributed ledger technology that underpins most of them hinges on an open international network of computers that collectively track their value.
Cryptocurrencies are turning out to be more than the fad some believe them to be. The pandemic has given new life to the most popular cryptocurrency, bitcoin, which more than doubled in value so far this year. Trading in bitcoin futures contracts at Chicago exchange giant CME Group has also surged, with average daily volumes up 40-plus percent over last year, through May 6.
With its legacy of creating new trading markets, Chicago became a hub for the industry in recent years. While it had setbacks, with some operations shutting down, new ventures have sprung up, including Bitnomial. That cryptocurrency exchange, led by founder and CEO Luke Hoersten, won regulatory approval this year. Accelerator DeFi Alliance also launched this year, with backing from DRW Trading.
DRW’s Cumberland cryptocurrency unit supports New York’s Association for Digital Assets but is working with multiple groups on a regulatory ecosystem. Cumberland’s director of strategy, Brian Melville, says: “We believe having clear, sensible rules is an important and necessary step in the development of this emerging asset class,” he says in an emailed statement. “We expect that some associations may merge as the discrete issues they are addressing start to converge.”
The Global Digital Asset & Cryptocurrency Association effort grew out of a Chicago event last year sponsored by Fintank, a local fintech booster. With a plug there from then-Mayor Rahm Emanuel, Drawbridge’s Lisle joined with K&L Gates attorney Cliff Histed, a former CFTC lawyer, and Gabriella Kusz, a former World Bank executive who has consulted with SROs, to spearhead the Chicago group.
As part of a larger, 16-member committee, they crafted a cryptocurrency industry code of conduct over the past couple of months and circulated it to a broader group of about 40. In developing the code, Lisle says they cribbed from the foreign exchange market. A distinguishing feature of their approach is a related arbitration system that will allow market participants to resolve disputes before a panel of their member peers. “This new group wants to create an SRO with teeth,” Histed says.
To lure members, the associations will have to strike a balance between serving the industry’s needs and enforcing the rules. Self-regulatory regimes suffer when member conflicts of interest go unchecked.
Kusz emphasizes that the Chicago group is taking a grassroots approach and soliciting input from a wide array of market participants. The New York organizations have cultivated support from a narrower range of interests.
The Virtual Commodity Association was launched by cryptocurrency exchange Gemini Trust, which appointed one of its top executives, Yusuf Hussain, as the association’s president. VCA agrees with the need for industry self-regulation and is seeking SRO status, he says. “When regulation is done right it can pave the way to healthy and sustainable markets,” Hussain testified before the CFTC technology advisory committee in February. “Regulation is the pathway to building trust and broader market adoption.”
The Association for Digital Assets, which also testified before the CFTC committee, is backed by a handful of trading firms and other market participants, such as Cumberland and Hudson River Trading. It doesn’t necessarily believe that a self-regulatory organization is necessary and doesn’t want to disrupt the market’s unique non-institutional aspect, says Brad Vopni, a founding board member of that association and a top Hudson River executive. “It’s not a perfectly clear path as to what the optimal outcome is,” he says in an interview. For now, he expects the associations will be both collaborators and competitors.