The case for self-regulation for the digital assets industry

Abstract

The concept of self-regulation and the use of self-regulatory organisations (SROs) as a feature of legal and regulatory frameworks has been adopted to support effective and efficient capital market development in a number of countries around the world. Most notably, the International Organization of Securities Commissions (IOSCO) set forth through its SRO Consultative Committee a ‘model for effective self-regulation’, the general principles for self-regulation and why self-regulation should be incorporated into regulatory frameworks. Since 2000, this has served as the outline for SRO development. Today, many countries are struggling with the question of how to regulate cryptocurrency and digital assets — including the US. The rapid evolution, high degree of expertise and understanding needed, and decentralised, cross-border nature of digital assets presents unique challenges for regulators. In the wake of the failure of the centralised finance (CeFi) digital asset exchange FTX, this research explores whether an SRO may be suited to the nature of the digital asset industry and how it may provide a strong complement to formal US government regulation. Such a complementary relationship may offer United States regulators and legislators a mechanism for providing a high degree of regulatory coverage which balances the need for consumer protection and market integrity with the need for innovation. In exploring this subject, researchers undertook desk study on the IOSCO Framework for Effective Self-regulation and explored existing and emerging national SROs in the digital asset space. Desk study was coupled with individual one-on-one interviews with global digital asset industry leadership and public roundtable forums. This research concludes that an SRO may serve to provide the US legal and regulatory framework with a high-quality solution to the challenges of legislating and regulating in the ever-changing environment of digital assets.