Can crypto regulate itself? The Lummis-Gillibrand bill hopes so.

Creating the equivalent of the stock markets’ FINRA for crypto is the ideal, but experts doubt that it will be easy.


The idea of creating a government-sanctioned private regulatory association has been drawing more attention in the debate over how to rein in a fast-growing industry whose technological quirks have baffled policymakers.

Illustration: Christopher T. Fong/Protocol

Regulating crypto is complicated. That’s why Sens. Cynthia Lummis and Kirsten Gillibrand want to explore the creation of a private sector group to help federal regulators do their job.

The bipartisan bill introduced by Lummis and Gillibrand would require the CFTC and the SEC to work with the crypto industry to look into setting up a self-regulatory organization to “facilitate innovative, efficient and orderly markets for digital assets.”

The idea of creating a government-sanctioned private regulatory association — similar to FINRA, which works with the SEC, and NFA, which works with the CFTC — has been drawing more attention in the debate over how to rein in a fast-growing industry whose technological quirks have baffled policymakers.

A crypto SRO could play an important role in helping the federal government “oversee the burgeoning cryptocurrency industry,” a group of attorneys, including former CFTC Chair J. Christopher Giancarlo, wrote in February 2021.

“Given the infancy of cryptocurrency and the complexity of its underlying technologies, substantial technical input from stakeholders is crucial for the development of sound regulatory policies,” they said.

Proponents of a crypto-focused SRO cite the role FINRA plays in regulating the capital markets. The agency, under the SEC’s supervision, writes and enforces rules and makes sure brokers are complying with them.

FINRA “plays a critical role in ensuring the integrity of America’s financial system — all at no cost to taxpayers,” according to its website. The NFA fulfills similar responsibilities for the CFTC.

Jonah Crane, a partner at Klaros Group, said setting up an SRO for crypto would “represent a major step forward in the professionalization of the digital asset industry.”

An SRO would “form the first line of defense for regulating large, complex markets,” he said. Typically self-funded, the organizations can “be more hands-on” while ensuring “proper accountability to the regulatory agencies and ultimately to the public through Congress,” Crane added.

The crypto industry has taken steps to set up its own SROs. In 2018, a group of crypto companies led by Gemini launched the Virtual Commodity Association to serve as an SRO for the “virtual currency industry.” That same year, companies like Paxos and Galaxy Digital formed the Association for Digital Assets Markets. Neither has actually taken on that role: The VCA describes itself as “working towards establishing itself as an SRO” and ADAM says it is currently an “information exchange” for the industry.

The slow progress is likely because the idea of an SRO for the crypto industry has been controversial.

Some crypto groups oppose the idea, Lummis said. “While they're butting heads, it makes it hard for us to move forward on provisions like that,” she told Protocol. “If that fight were to become very divisive within the industry, it would prevent us from being able to move the bill forward easily.”

The dispute centers on a contentious point: Which federal regulator is going to take the lead in regulating crypto?

Perianne Boring, founder of the Chamber of Digital Commerce, said “self-regulation” will be an important component for “every significant industry.”

“But it doesn’t replace the certainty that regulatory oversight engenders for an industry, particularly one that is quickly evolving,” she told Protocol.

Kristin Smith, executive director of the Blockchain Association, said “there may be a role for an SRO” but that is not a decision that should be made right now. “What we need to do right now is figure out what agency is going to have the overarching jurisdiction,” she said.

The crypto industry clearly prefers the CFTC to take the lead, instead of the SEC, which has been criticized for aggressive enforcement actions.

A crypto SRO might not expect a warm welcome from its peers, even as the wealth management industry increasingly blends crypto and stock trading.

FINRA has taken a critical posture toward crypto. In 2019, following the wave of initial coin offerings, its chief legal officer, Robert Colby, said, “A lot of these ICOs are techno wrappers around penny stocks.”

In 2018, FINRA charged a Massachusetts broker for “unlawful distribution of an unregistered cryptocurrency security” called HempCoin.

FINRA has also been criticized for failing to act on some crypto broker applications “because they don't have the right sort of guidance from the SEC,” Smith said.

FINRA declined to comment.

Smith said that based on “where the Lummis bill stands today, where it really focuses on the CFTC, it may be through that process that there is an SRO that works with the CFTC.”

But the CFTC will likely share center stage with the SEC. Despite the perception that the Lummis-Gillibrand bill would give the CFTC the main oversight role for crypto, Lummis recently clarified that that’s not the case.

While she views the biggest cryptocurrencies by market cap, bitcoin and ether, as commodities and therefore subject to CFTC regulation, most other cryptocurrencies will likely be regulated as securities by the SEC, she said.

“There are thousands of cryptocurrencies that, under the Howey Test, are securities. They just are,” Lummis said.

The Blockchain Association is pushing back on that view, which is bound to be a major point of debate in crypto regulation. “I think this is evolving legislation,” Smith said. “We believe that a vast majority [of tokens] that are traded on exchanges in the United States are commodities.”

Settling that issue is a key hurdle for creating an SRO for the industry. So is the industry’s youth, said Marc Fagel, the SEC’s former regional director for San Francisco and now a lecturer at Stanford Law School.

FINRA dates back to 2007, when the National Association of Securities Dealers merged with NYSE Member Regulation to form a unified stock-markets SRO. NASD itself dates back to 1939, and the NYSE traces its roots back to 1792.

Fagel said he remained “dubious about an SRO in the crypto space at this time,” suggesting the industry is simply too new and undeveloped to regulate itself.

“With FINRA, you have long-standing broker-dealers whose legitimacy and financing are well established,” Fagel told Protocol.

“How many players in the crypto space have the same bona fides such that the regulators are willing to delegate them oversight authority? … The brokerage industry is heavily regulated and populated by seasoned companies, while crypto is still the Wild West.”


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