Wednesday, March 14, 2018

Onward and upward: Winklevoss proposal for Virtual Currency Association lauded by Commissioner Quintenz

By Brad Rosen, J.D.

Cameron and Tyler Winklevoss announced the establishment of the Virtual Currency Association (VCA), the first self-regulatory organization (SRO) for the cryptocurrency industry, and drew prompt recognition and words of praise from CFTC Commissioner Brian Quintenz. The commissioner commended the Winklevoss twins for “their energetic leadership and thoughtful approach in outlining a virtual commodity self-regulatory organization (SRO) concept” in a statement.

The storied Winklevoss brothers have been leading entrepreneurs in the cryptocurrency space and founded Gemini, a digital currency exchange, in 2015. They have frequently called for the sensible regulation of the virtual currency industry as a precursor for it gaining credibility and legitimacy. The proposal for establishing the VCA appeared on the Gemini blog, and comes in the wake of Commissioner Quintenz’s speech last week before the Chamber of Digital Commerce Summit where he provided a roadmap and urged the virtual currency industry to embrace and adopt a robust self-regulatory approach.

Many of points noted in the VCA proposal correspond closely with the recommendations contained in Commissioner Quintenz’s remarks before the digital chamber. Some of the highlights according to the proposal follow.

Essential characteristics. The Virtual Commodity Association will be an industry sponsored self-regulatory organization for the U.S. virtual currency industry, specifically virtual commodity exchanges and custodians. It will be a non-profit, independent regulatory organization that does not operate any markets. The VCA will not be considered a trade association, but will be seek to be in compliance with global standards and best practices for SROs.

Purpose. The VCA will seek to accomplish the following:
  • foster financially sound, responsible, and innovative virtual commodity markets through a system of industry sponsored standards, sound practices, and oversight that promotes price discovery, efficiency, and transparency;
  • incentivize the detection and deterrence of manipulative and fraudulent acts and practices, including partnering with regulators and particularly the CFTC to share or refer information, as appropriate; and 
  • require member firms to commit in writing, upon joining VCA, to operate their virtual commodity markets in compliance with sound practices and provide sanctions based accountability program to compel ongoing member compliance.
Structure, membership and governance. The VCA will be governed by a board of directors which will include a required number of independent directors and will be funded by member fees. Membership will be open to virtual commodity platforms, custodians, OTC trading firms, and other trading facilities acting as counterparties that:
  • provide an all-to-all platform or venue, available to U.S. participants, for transacting in the spot virtual commodity markets, or provide OTC or off-exchange services, available to U.S. participants, for transacting in the spot virtual commodity markets; and
  • when applicable, are in compliance with and have obtained relevant licenses required to operate a business that involves holding customer fiat funds and the custody of customer virtual commodities. 
Sound Practices and annual certification by members. Members will be required to certify annually to VCA that they are in compliance with “Sound Practices,” which will include:
  • establishing systems to assure responsible financial management, and implementing a transparent program of controls for members to ensure confidence in the fiscal soundness of members and to encourage customer confidence;
  • providing appropriate transparency regarding bids, offers, executions, and other relevant data to the public; and adopting policies to avoid conflicts of interest; 
  • maintaining and enforcing a system of marketplace conduct rules; and implement policies and procedures to respond to and address customer concerns and complaints;
  • implementing and maintaining current best practices with respect to cybersecurity, information security, and recordkeeping;
  • monitoring and surveilling markets to detect and deter manipulative and fraudulent acts and practices;
  • entering into information sharing agreements for the purposes of marketplace surveillance with other members and with regulated exchanges and trading platforms that list products based on virtual commodities;
  • cooperating with regulators and agreeing to report instances of manipulative and fraudulent conduct to the CFTC and other regulators as appropriate; and
  • performing proper diligence and legal analysis when determining the legal status of a virtual commodity for potential listing and trading in order achieve legal compliance. 
Onward and upward. For his part, Commissioner Quintenz observed, “Ultimately, a virtual commodity SRO that has the most independence from its membership, the most diversity of views, and the strongest ability to discover, reveal, and punish wrongdoing will add the most integrity to these markets.”

In concluding, the Winklevoss twins observed that the SRO approach has historically worked to protect and police various markets, noting the role NFA has played as an SRO for the U.S. derivatives industry. They believe the NFA example can serve as a model for how the VCA could work in concert with the CFTC to provide additional oversight to virtual commodity cash markets.

In their usual fashion, the Winklevoss twins signed off the blog post “onward and upward.” As to the future and fate of Virtual Currency Association, only time will tell.

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