The cryptocurrency space has been fraught with cases of fraud and scams and with it being such a new industry with little in the way of regulation, it has been an ongoing focus of governments. This focus has only increased in recent months due to the number of high profile incidents, such as the theft of $500 million of digital money from the Coincheck Exchange.
This incident, and subsequent action from the regulators, added to the ongoing pressures to introduce regulation into the cryptocurrency space; assuming that we haven’t seen a bubble burst, it was one of the major contributing factors to the fear, uncertainty and doubt that has seen a cryptocurrency crash and an ongoing bear market, prices having fallen over 70% from all-time highs set in December 2017 and January 2018.
The discussions around Cryptocurrency regulations have even reached as high as the recent G20 Summit in Argentina (March 19th 2018).
Whilst some key concerns around cryptocurrency dangers were highlighted (such as consumer and investment protections and their use to shield illicit activity and for money laundering and terrorist financing), the G20 has rejected calls for regulation and have instead been urged to lessen the risks by working together to improve conduct, market integrity and cyber resilience in the cryptocurrency sector.
This has alleviated some of the fears in the industry of any major regulation being implemented any time soon and opens up opportunity for the industry to work with governments and take action to ensure this delay of regulation becomes permanent.
In a proactive move, The Japan Blockchain Association (JBA) and the Japan Cryptocurrency Business Association are expected to merge to create a new self-regulatory organisation to strengthen self-regulation which, if approved, could act as an independent regulatory body of the government.
The UK has followed suit with seven British cryptocurrency companies having set up CryptoUK, a crypto trade association intended to improve industry standards and engage policy makers. Meanwhile in South Korea 66 members have signed up to the Korean Blockchain Association including 25 of the biggest crypto exchanges with a view to self-regulate.
Perhaps the biggest news however, is that of the Winklevoss twins’ intention to create the Virtual Commodity Association, a self-regulatory organisation meant to police digital-currency markets and custodians in the USA. The high-profile brothers, who run the Gemini exchange, aim to develop industry standards, promote transparency and work with regulators including the U.S. Commodity Futures Trading Commission to prevent fraud.
Benefits of self-regulation
Having a self-regulatory body for the cryptocurrency space has a number of benefits to the industry.
Combatting heavy regulation
One of the key benefits is demonstrating that the industry is being proactive and responsible about protecting investors, preventing fraud, protecting against cyber-attacks and stamping out scams. This could be enough to appease regulators enough to delay or stop the introduction of heavy regulation. This assumes that the self-regulation goes far enough and proves to be effective.
By removing the threat of heavy regulation and replacing it with self-regulation, a high level of uncertainty is removed, bringing back confidence in the market and allowing organisations to plan effectively with a renewed focus on innovation.
Fit for purpose and industry specific
Industry driving self-regulation will ensure that this regulation is not only fit for purpose, allowing innovation in the space to continue, but also adaptable and able to evolve according to need or market changes. Additionally, rather than a one size fits all approach, separate and specific regulations could be developed for different types of cryptocurrencies such as privacy coins, smart contracts and settlement networks amongst others. The following graph provides an example of how cryptocurrencies may be differentiated, although this could be split even further.