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Regulate yourself, a top U.S. official tells crypto companies

·Senior Columnist

A top U.S. financial regulator encouraged the digital currency industry to formally begin regulating itself, at the Yahoo Finance All-Markets Summit on Feb. 7 in New York City.

Brian Quintenz, a commissioner with the Commodity Futures Trading Commission, said that while the government tries to figure out what to do about bitcoin and hundreds of other cryptocurrencies, the crypto industry should form a so-called self-regulatory organization, or SRO, similar to those that exist in other parts of the financial system.

“I would like to use this opportunity right now to call on the investment community and the advocacy community around digital currencies to create some type of self-regulatory organization that can develop standards around cyber policies, data retention, record keeping, financial records obligations, insider trading, ethics, codes of conduct,” Quintenz said during an interview at the Yahoo Finance event. “Self-regulation has a strong history in our markets.”

Regulation is a fraught topic in the cryptocurrency world. Some purists feel the main virtue of cryptocurrencies is the ability to evade government regulation and the myriad rules that govern most financial markets. But others feel regulation is inevitable, and say it’s in the industry’s interest to be proactive and accept—or even promote—sensible regulation.

At a Senate hearing on Feb. 6, the heads of the CFTC and the Securities and Exchange Commission expressed both enthusiasm and alarm at the rapid, turbulent rise of cryptocurrencies. The regulators pointed out that there are no government backstops for crypto exchanges such as Coinbase and Kraken that handle billions of dollars in consumer funds, the way there’s FDIC insurance for bank deposits. But they also said new forms of currency represent worthwhile financial innovation, suggesting they ought to be regulated deftly.

Industry analysts say cryptos are so new and different that Congress would have to pass a law stipulating which federal agency should govern them, while outlining how they should be governed—as a tradeable security? A commodity? A currency similar to the U.S. dollar? States have some jurisdiction, too, muddying the picture of who should be in charge.

But it could take years for Congress to act, given the plodding pace of action on Capitol Hill. In the interim, Quintenz said at the Yahoo Finance event, the industry has an opportunity to establish its own regulatory structure and possibly pre-empt a sterner government hand. One risk is that some cataclysmic event–such as the 2013 collapse of the Japanese cryptocurrency exchange, Mt. Gox–could occur while there’s no regulatory structure in place, harming consumers and generating a backlash against the industry.

The best model for a crypto SRO is probably the Financial Industry Regulatory Authority, or FINRA, which oversees more than 4,500 brokerage firms in the United States, setting licensing requirements, enforcing trading rules and settling disputes. SROs aren’t free of government regulation. In essence, the government sort of deputizes such groups to enforce rules that regulators deem to be in the public’s interest, on matters such as consumer protection, ethics enforcement and professional requirements.

SROs aren’t a panacea, however, and some consumer advocates liken them to coyotes guarding the henhouse. In the lead-up to the 2008 financial crash, for instance, FINRA and other financial-industry groups clearly failed to stop the fraud and excess that eventually threatened the entire financial system. Congress, as a result, passed strict new rules in subsequent years—exactly the kind of muscular intervention the crypto industry hopes to avoid.

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