The Virtual Commodity Association Wants to Create a Self-Regulatory Organization for the U.S. Crypto Industry

The Virtual Commodity Association (VCA), first proposed on 13 March 2018 by Cameron Winklevoss, co-founder and President of the Gemini digital asset exchange, announced on 20 August 2018 that it finally has formed a working group, with Gemini, Bittrex, Bitstamp, and bitFlyer as the first four members. 

In the original proposal, which was published as a blog post, Cameron Winklevoss explained the reason for using the term "virtual commodity", namely that the U.S. Commodity Futures Trading Commission (CFTC) views cryptocurrencies such as Bitcoin as commodities:

"The legal status of bitcoin as a commodity was established by the CFTC in the 2015 order against Coinflip, Inc. This order stated that “Bitcoin and other virtual currencies” fall under the definition of a “commodity” as defined in Section 1a(9) of the Commodity Exchange Act of 1936 (CEA). This was recently confirmed by the U.S. District Court for the Eastern District of New York. As a result, virtual commodities like bitcoin (as a group, these are referred to in this document as “virtual commodities”) are “exempt commodities,” which is the same category in which the CFTC places metals and energy commodities, including gold, silver, oil, and natural gas. The cash markets (or spot markets) for exempt commodities, including virtual commodities, do not fall under the jurisdiction of the CFTC; however, the CFTC does have fraud and manipulation enforcement jurisdiction over these markets and market participants under the CEA. "

He went on to say that due to unique qualities of the cash markets for virtual commodities (such as "strong speculative interest"), it was important to add "an additional layer of oversight" in the form of self-regulation in order to protect consumers and to ensure integrity of these markets. This self-regulatory organization would be called the Virtual Commodity Association (VCA). He said that the VCA would have these characteristics:

"The VCA: (i) will be a non-profit, independent regulatory organization that does not operate any markets, (ii) will not be a trade association, (iii) will not provide regulatory programs for security tokens or security token platforms, and (iv) will be in compliance with global standards and best practices for SROs."

He then described the goals of the VCA:

  • "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."
  • "Require member firms to commit in writing, upon joining VCA, to operating their virtual commodity markets in compliance with Sound Practices, described below; and provide a sanctions based accountability program to compel ongoing member compliance."

The VCA, he said, would be open for membership to "virtual commodity platforms, over-the-counter (OTC) trading firms, and other trading facilities acting as counterparties" that either provide "all-to-all platform" or OTC (off-exchange) services to U.S. participants for "transacting in the spot virtual commodity markets."

According to the VCA's website, members must follow the following "sound practices":

  • "Establish custody protections and security measures appropriate for virtual commodities"
  • "Adhere to customer communication and disclosure standards that are clear, accurate, fair, and timely"
  • "Provide appropriate transparency regarding bids, offers, executions, and other relevant data to the public"
  • "Maintain and enforce a system of marketplace conduct rules"
  • "Implement and maintain current best practices with respect to cybersecurity, information security, and recordkeeping"
  • "Monitor and surveil markets to detect and deter manipulative and fraudulent acts and practices"
  • "Agree to enter into reasonable 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"
  • "Agree to report instances of manipulative and fraudulent conduct to the CFTC and other regulators as appropriate"

The VCA's press release says that the interim Executive Director of the VCA will be Maria Filipakis, who was formerly an Executive Deputy Superintendent at the New York Department of Financial Services (DFS). 

At the inaugural meeting of the VCA Working Group, which is planned for next month, the Working Group participants are expected to discuss, in addition to staffing, "guidelines for membership in the VCA", "guidelines for best practices and rules-based marketplaces that will promote fairness, transparency, risk management, and liquidity", and "guidelines for best practices that will address Member conflicts of interest, client communications, client disclosures, and record keeping."

Bitstamp's CEO, Nejc Kodrič, had this to say about today's annoucement:

“We’re proud to be a part of the Virtual Commodity Association as a way to add another element of protection for consumers. We believe in the value of self-regulation, which we pursued in Europe almost from our inception, and look forward to following a similar path in the U.S. Those that can’t or won’t comply with regulations put consumers – and their own operations – at risk.”

As for Bittrex, its Chief Compliance and Ethics Officer, John Roth, stated:

“The blockchain industry must focus on protecting its customers and operating in a responsible manner to significantly increase adoption globally. By working with the VCA, we can advance our shared goals of improving transparency, accountability and security across all virtual currency trading platforms. This effort will also complement our discussions with regulators and legislators about developing a long-term solution that creates a fully-compliant environment for blockchain while encouraging innovation, economic growth, and U.S. leadership in the industry.”

Cameron Winklevoss made this comment on Gemini's blog earlier today:

"The SRO approach has historically worked to protect and police various markets. For example, the National Futures Association (NFA) is an SRO for the U.S. derivatives industry and is a model for how the VCA will work together with the Commodity Futures Trading Commission (CFTC) to provide additional oversight to virtual commodity cash markets. The promise of virtual commodities and their impact on the future will be profound — but individuals and institutions need to feel safe and secure when transacting on marketplaces. A thoughtful SRO framework that provides a virtual commodity regulatory program for the virtual commodity industry is the next logical step in the maturation of this market."

And finally, Brian D. Quintenz, who was nominated by President Trump as a Commissioner of the CFTC on 12 May 2017 welcome today's news with the following statement:

"Given the absence of federal oversight jurisdiction in the crypto market, in February and again in March of this year I called on the crypto platform community to come together and develop a self-regulatory organization-like entity that could develop and enforce rules.[1] I am pleased that progress has been made on such a concept. Ultimately, an independent and empowered SRO-like entity could have a meaningful impact on the integrity and credibility of this young marketplace. Today’s announcement is a positive step towards that realization."

 

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