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Self-regulation & Consumer Protection for Virtual Asset Service Providers 

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Recent bankruptcies in the crypto space demonstrate the need for self-regulation in such a nascent and unregulated industry to protect the interest of the industry players (investors and consumers) against bad actors. It’s becoming clear that a self-regulatory paradigm, with global best practices, is necessary for the virtual asset sector. 

Central banks, governmental authorities, and regulatory bodies around the world are emboldened to point to these events in the crypto space to stop citizens from exercising their fundamental rights by placing an embargo on the facilitation of crypto trading through financial institutions. 

A perfect example is the Central Bank of Nigeria which instructed financial institutions not to facilitate the trading of crypto through their platform on the 5th of February 2021, and has also used recent happenings to back its reasons why blockchain and cryptocurrency should not be adopted.

Why Do We Need Self-regulation?

  1. Integrity

Self-regulation encourages honesty in the economy and among participants. Industry players will come together to create rules that they will follow and abide by, and this gives a sense of responsibility to every industry player and compels all to follow the rules.  If properly executed, having agreed rules can boost the integrity of the industry and encourage honesty. 

An example of this phenomenon is the proof of reserve system proposed by Binance, which has been adopted by other crypto banks, this is making users demand such from the VASPs holding their digital assets or move out their funds out of the platforms. 

Industry players are experts in the underlying technology that drives digital assets because they work in the blockchain industry. They are aware of the complex nature of the sector and the goods and services that its players market. This puts them in an excellent position to put self-regulatory practices into place.

According to the Self-Regulatory Organization (SRO) Consultative Committee of the International Organization of Securities Commissions (IOSCO), “the broad objectives of self-regulation are the same as those identified for government regulation of financial markets in the IOSCO Objectives and Principles of Securities Regulation: to preserve market integrity, preserve financial integrity, and protect investors”.

The significance of SROs cannot be overstated in a young and fast-expanding market like the virtual assets sector. SROs, according to the CEO of the Global Digital Asset & Cryptocurrency Association (Global DCA), “can serve as a powerful force for bolstering public trust and promoting industry growth, particularly in the case of cryptocurrencies, whether established by legal mandate or organised voluntarily by industry”.

  1. Obtain industrial sanity without government regulation

Crypto projects have been declared for bankruptcy and some of them leave the market with the funds of their users and investors freely because there isn’t regulation in place, these acts make users and investors traumatised after losing their hard-earned money to these events, self-regulation proves to be an effective form of regulation towards the sanity of the industry. 

The rules are made by the industry players, making it acceptable for them to play by the rules they have set and in turn cooperate with each other to build a self-regulated environment for the industry. If found wanting, a virtual asset provider will be made to answer for their actions and investors will be rest assured of getting their investments back and their interests protected

  1. Foster Innovation 

In a nascent space like the blockchain and crypto industry, self-regulation can promote regulation without stifling the growth and innovation of the industry. The industry players can innovate and improve the industry within the confines of the practices and regulations they have set for themselves. 

Self-Regulation Practices

The IOSCO SRO consultative template for self-regulation https://www.iosco.org/library/pubdocs/pdf/IOSCOPD110.pdf recommends the following standards apply to an SRO for VASPs:

  • Adopting a code of conduct, procedural regulations, and market-specific standards for the virtual asset business as a whole

Creating a code of conduct or rules and regulations while keeping the interest of the industry players at heart by making sure they are standards of the market will give a guideline for all VASPs to follow and abide with

  • Enforcing laws and regulations through disciplinary actions and investigations

Disciplinary actions and measures added to the rules for anyone who breaks or manipulates them, they can be made known if there are constant investigations done on VASPs from time to time

  • Conduct a simulated exam on finances, operations, and sales.

Constant audits of virtual asset platforms should be done by external bodies to assess their assets and make sure they are nowhere in insolvency so as to protect the assets of users

  • Have a surveillance operation in place to look for illegal activity.

Illicit and illegal activities such as money laundering and spending of users’ funds by virtual asset providers can be tamed to a very high extent if a surveillance program is put in place to investigate matters like this

  • Coordinating and exchanging information with SROs and other regulatory bodies.

Regulation is a dynamic effort as the industry continues to grow and the industry players continue to innovate, consulting and sharing information with other regulatory bodies and SROs will make the industry be regulated from a place of enough information

  • Establish a platform for resolving disputes.

Users will always have issues and conflicts with VASPs due to a lot of reasons which if not well managed might lead to a loss of confidence in the industry, creating a platform or forum where disputes between users, investors and VASPs or other parties will boost the confidence of investors and users

Developing SROs might then use the template as a guide for the establishment and development of their regulatory objectives and initiatives, especially in light of the technological and telecommunications-driven market structural changes. The template approach emphasises that SRO activities can be divided into individual components, allowing for flexibility in the design of SRO structures, such as arrangements for sharing or outsourcing among SROs.

The establishment of a template could result in a process in which SROs periodically exchange information regarding “best practices” as a means of continuously enhancing the efficacy of self-regulation within the regulatory framework. The regulatory structure and SRO structures should be adaptable to the industry’s constant evolution.

Places where the Cryptocurrency Industry have been Self-regulated

The countries of Japan, through the Japan Blockchain Association (JBA), and South Korea, through the South Korea’s Blockchain Association (SKBA), are the pioneers of self-regulation in the Crypto industry across the world. These associations boast over 150 members and over 40 exchanges between them.

Both countries created these blockchain associations to set the standards that guide the development of an excellent cryptocurrency business environment. The blockchain association also creates a user protection system that protects investments in the blockchain market.

Other countries that have a self-regulating cryptocurrency industry include Nigeria (however, SiBAN as an SRO has not been officially recognized by the SEC—the government agency that currently regulates VASPs in the Nigerian capital market), India and the United Kingdom. The associations created in all of these countries ensure the segregation of fiat customer funds from company’s funds, as well as paybacks for customers if there is a crypto crash. The United States is also considering the creation of an association that will self-regulate the crypto industry within the country.

Conclusion

This arrangement of self-regulation within these countries ensures that customers are protected from the fraudulent activities that are prone to occur within the crypto industry. With proper planning and implementation, and support from regulators, the global crypto industry can benefit from a flexible, compliant and innovative self-regulatory structure that could enhance the integrity of the industry. If properly established, such a system could increase the confidence of investors, consumers and regulators and would be greatly preferable to governments simply shutting down the industry. 

Author 

Oluwasijibomi Ajayi is a resourceful Product Manager, his focus is in the web3 space, offering a career history of success, driving organisational growth and new product development within the blockchain and cryptocurrency industry.

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