Crypto Industry Self-Regulating to Avoid Government Regulation
From the UK to India and Croatia, crypto-exchanges have recently begun banding together with the aim of not only forming industry-wide associations, but also of drawing up codes of conduct for each other to follow.
However, while it's only a good thing that they've begun openly committing to upholding more robust standards, it's clear that much of this commitment is being made as a result of threats of stricter government regulation. As such, it's not entirely certain whether the associations now being formed will be more about actual regulation and enforcement, or more about public relations and government lobbying.
In the UK, a number of exchanges and companies formed the nation's first-ever self-regulatory organization (SRO) last week. Dubbed CryptoUK, it has already established a code of conduct, which includes standards relating to the use of cold wallets, to customer checks, to clear info on prices, and to clear communications with users.
It was with apparent pride that Iqbal V Gandham – the chairman of CryptoUK for its inaugural year and also the UK managing director of a trading platform eToro – described CryptoUK’s aims. It intends to protect against "rogue operators and consumer harm […] to promote best practice and to work with government and regulators to ensure that the UK benefits from [cryptocurrencies]."
Something similar can be found in other nations, starting with South Korea, where 66 exchanges and companies recently signed up to the Korean Blockchain Association (KBA). As explained by Kim Jin-hwa, the co-founder of the Korbit exchange, the KBA will work to make exchanges more secure and transparent. "That means cryptocurrency exchange operators have to find ways to have stable and transparent trading systems for greater social responsibility."
Included in the Association's voluntary regulations are requirements for exchanges to keep at least 70% of their cryptocurrency holdings in cold (i.e. offline) storage. Such measures will help ward off a repeat of the hack that effectively shut down an exchange Youbit in December, when criminals stole almost 20% of its customers' assets.
Yet a big part of the motivation for self-regulating isn't simply increasing security, but also avoiding stricter government regulation. For example, a day before plans for a Korean blockchain body were announced, the South Korean government revealed its own plans to begin regulating crypto-exchanges.
Included as part of 'emergency measures' to contain the then-exploding growth of cryptocurrency values, the government had raised the possibility on December 12 of even taxing capital gains made on crypto trading. It has also raised the possibility of banning crypto trading altogether.
It's in such a threatening context that the move towards self-regulation makes more sense, emerging as an attempt to dissuade governments from imposing their own, harsher regulations. As the KBA declared when it was formed in January, “The association wants to be an effective communication channel between the government and the industry.”
Put differently, the organisations now emerging aren't simply self-regulatory bodies, but also lobbying groups. And part of their function won't be just to exert pressure on governments to enact favourable legislation, but also to 'educate' the public about cryptocurrency. To some extent such education will be genuinely helpful, with the KBA's chairman, Chin Dae-jae, saying, "I will also take the initiative to create an environment where investors can learn how to use virtual currency."
A misunderstood sector
Yet on the other hand, the bodies will work to alter public perceptions and attitudes, which in turn can influence the regulatory actions of governments. As CryptoUK underlined in its launch statement, it "will work to raise understanding of the [cryptocurrency] sector at a time of significant growth in popularity … This is a severely misunderstood sector that has great potential to improve our society."
Such PR functions are also evident in Japan, where two pre-existing crypto groups Japan Cryptocurrency Business and Japan Blockchain Association agreed to merge last week.
That SROs will also focus on public relations and government lobbying is important, because it could mean that the regulations that do end up being adopted could be more beneficial for cryptocurrency exchanges and businesses than for the general public. Added to this, resources spent on 'communication' could potentially detract from efforts to make the crypto-industry more robust and secure as a whole, as was admitted by executives in the case of an exchange Coincheck, which suffered a USD 400 million hack last month.
The public shouldn't therefore assume that, just because crypto-exchanges are implementing self-regulation, it won't be necessary to watch them closely. Still, the public commitment now being made by the crypto-industry to set itself standards is a positive development. At the very least, it shows that the industry is serious about gaining wider trust. At best, it will make it very difficult for more dubious crypto-exchanges to operate in the future.