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Collective groups and associations aim to set crypto industry standards, but will this guidance have any practical impact on adoption?
Although some governments and authorities still regard the cryptocurrency sector as the “Wild West,” steady growth and growing use cases demonstrate that digital currencies are here to stay. Some predict that blockchain-based networks and decentralised finance, or DeFi, platforms will eventually replace existing financial institutions.Nonetheless, despite continued advancement, the crypto business is still in its infancy and, as such, requires further development before it can be generally recognised. One area in particular that needs deeper addressing within the crypto space is regulation.
Given the disruptive nature of the novel technology, Mohamed El-Erian, chief economic advisor at Allianz, a German multinational financial services company, stated in a Financial Times article that it is the responsibility of crypto supporters to cultivate better relationships with regulatory stakeholders.
Fortunately, several members of the crypto community see the importance of cultivating relationships with regulators, legislators, and the public sector in order to promote adoption. As a result, working groups dedicated to defining blockchain standards are beginning to appear.
Working groups drive innovation for adoption
For example, executives in the cash-to-crypto market recently announced the foundation of the Cryptocurrency Compliance Cooperative, or CCC. The CCC, which was founded by Bitcoin ATM operators DigitalMint and Coinsource, as well as blockchain analysis platform Chainalysis, is a collaborative association that aims to set compliance standards to legitimate the Bitcoin ATM business in the United States.
This is especially crucial given the fact that about 48 bitcoin ATMs being deployed in the United States every day. While impressive, industry participants have previously remarked that in countries such as Canada, Know Your Customer compliance for crypto ATMs has just recently been established.
Bo Oney, executive vice president of operations and head of compliance at Coinsource, told Cointelegraph that although there has been exponential growth and maturity in the cash-to-crypto industry — especially with Bitcoin ATMs in the U.S. — there is still a lack of Anti-Money Laundering processes among companies. Many of these operators also lack financial crime prevention departments. As such, Oney explained that the CCC was formed to combat fraud and nefarious use cases:
“The best way to overcome the challenges faced by the cash-to-crypto industry is through this cooperative. We plan to publish logical and responsible standards that adequately address the concerns we are seeing, and then to share them with our industry. We hope that these are adopted in scale by all the companies in this sector and that we can define future regulations.”
While developing standards for the cash-to-crypto industry is the main objective behind the CCC, it’s important to point out the collaborative nature of the association. Marc Grens, co-founder and president of DigitalMint, told Cointelegraph that CCC hopes to bring together some of the best minds in the industry. Grens noted that this will ultimately allow for key players in the space to join forces to determine standards for an ever-growing, often misunderstood sector.
Grens emphasized that there wasn’t much of an impact when the Financial Crimes Enforcement Network, of FINCEN, came out with official guidance in 2013 saying that cryptocurrency exchanges and money transmitters must act as money services businesses under the Bank Secrecy Act:
“This guidance is like putting a square peg in a round hole. Regulators didn’t know much about cryptocurrency at this time, and basically took that act and shoved this industry in there. These individuals aren’t looking behind closed doors at what is really going on though.”
As Grens explained, the cash-to-cryptocurrency industry learned early that organizations needed to come together to deliver data-driven, objective facts about the fraudulent activity happening in the space: “The current money service business act is not enough to combat illicit activity.”
Oney further hopes that the CCC will become a milestone for the crypto ecosystem, as different players in an emerging, increasingly competitive space will join forces to develop standards for the betterment of an industry: “We don’t need government involvement to set standards.”
Despite this, Oney stated that the CCC has tight contacts with members of US law enforcement, including those with the Federal Bureau of Investigation, the Department of Homeland Security, and local and state agencies. “We want to educate and engage with these people about what the standards should be. They may then put the policies into action.”
The CCC is only one example of a collaborative organisation working to develop cryptocurrency sector standards that authorities may use. According to Hailey Lennon, a lawyer at law firm Anderson Kill, many trade organisations have emerged in recent years. She mentioned that some of these include the Blockchain Association, Virtual Commodity Association and Crypto Council for Innovation.
According to Lennon, it is natural for crypto and blockchain companies to want to be a member of working groups and trade associations to help educate authorities, especially with so many various state and federal legislation flying around: “Regulation stifles innovation; well-designed regulation causes less harm.”
This appears to be the situation with the maturing cryptocurrency business. Chen Arad, chief operating officer of Solidus Labs, a risk monitoring platform for digital assets, for example, stated that collaborative organisations that share data and cross-market surveillance are critical to answering the Bitcoin (BTC) futures exchange-traded fund (ETF) question. He stated:
“The lack of shared surveillance agreements in crypto is the main reason for the SEC’s rejections of Bitcoin-ETF rule-change applications. The SEC wants to know if traders are manipulating Bitcoin across more than one exchange. Monitoring for this requires data-sharing agreements that would allow cross-market surveillance.”
Arad added that aside from the crypto sector, there have been plenty of examples of industry-driven self-regulation that has enabled new technologies to solve regulatory challenges and prosper. “The Online Lending Network in the lending space and the Intermarket Surveillance Group in the securities space have been created by those industries to solve very similar cross-platform concerns.”
Will working groups make an impact?
Lennon pointed out that many of the cryptocurrency working groups and collaborative associations mentioned are not currently recognized as official self-regulatory organizations, or SROs. In turn, Lennon explained that it may be challenging for regulators to work with these groups:
“An SRO is typically given legislative authority from a regulatory agency that allows it to create policies and enforce them in a specific industry. For example, FINRA is an SRO for the U.S. Securities and Exchange Commission. Currently, none of the organizations mentioned here have the legislative authority to function as an SRO and, therefore, they are more trade associations or working groups who provide suggestions for how regulations impact the space.”
Lennon emphasised that while these organisations are beneficial, they do not have the same authority as SROs. Similarly, Zachary Kelman, senior partner of Kelman PLLC and general counsel of Cointelegraph, says that having an organisational body put forth standards is beneficial, but that the federal government generally looks at established sector norms: “The federal government has an agenda. They manage money-transfer enterprises and want them to follow particular laws.”
Despite this, Kelman stated that it may be easier for crypto working groups to approach state authorities when it comes to standards, especially because many U.S. jurisdictions, such as Florida, , now try to become crypto havens:
“It may be possible to have a standard for cryptocurrency ATMs on a state level as an educational tool for state regulators. If these standards are fairly uniform across the industry, then this could be helpful to coordinate efforts across the country.”
While this makes sense, Lennon remarked that another challenge is the growing number of working groups within the crypto space. In particular, Lennon is concerned that with so many working groups, there are overlapping goals and potentially conflicting messages: “In a perfect world, there would be collaboration between, or merging of, many of these groups to bring more cohesion to the industry.”