The implementation of self-regulation is necessary in order for any industry to be healthy, irrespective of the decisions and laws of outsider rulemakers. Self-regulation can be described as the founding of institutions to safeguard trust and quality in an industry by monitoring, promoting and enforcing standards of conduct. This is not a new idea – for centuries, working communities have machined standards and guidelines for groups and organizations to abide by.
Medieval guilds provide a good case study. Guilds were organizations of craftsmen working in a particular industry. They set up the apprentice-journeyman-master pipeline for enterprising newcomers and they vetted admission to each tier. They also mediated disputes between practitioners, established quality standards and did a host of other things that helped create and protect trust in their industry. Many of these things were implicit, unspoken and passed down as tradition without written law from far-away bureaucrats.
Miguel Morel is founder and CEO of Arkham Intelligence, a blockchain analytics company. This piece is part of CoinDesk's "Policy Week."
There is always the risk that self-regulating institutions, like any other, can decay and become rent-seeking rather than prosocial guardians. By the 1600s, medieval guilds had become entrenched monopolies that resisted technological innovation and prevented talented newcomers from displacing the old guard. If that sounds familiar, the same is true today of our modern financial system’s regulatory bodies.
Nevertheless, there being a risk of such corruption is not a good reason to abandon self-regulation entirely. The alternative – varying levels of industrial anarchy and “Wild West” practices – is even worse, as the crypto crisis of the past year violently illustrated. Avoiding these failure modes and successfully implementing self-regulation in the blockchain ecosystem first requires the involvement and leadership of people of high competence and integrity.
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Fortunately, the technological fundamentals of blockchain technology such as decentralization, auditability and the visibility of on-chain data provide a toolbox for making self-regulation easier.
If a project commits to a set lockup schedule, this can be easily verified on-chain by anyone. The role of the self-regulating institutions, then, is to monitor and interpret this data, as it is often difficult to understand and the details can sometimes be subject to debate. Additionally, the public nature of blockchains prevents gatekeeping and allows members of the ecosystem to verify the work of these institutions, helping to stave off corruption.
Efforts towards crypto self-regulation have already begun to blossom from the ashes of 2022. There is much greater interest in verifying the claims of exchanges and projects with on-chain data. There is a need for trusted institutions, such as companies working in blockchain analytics or market surveillance more broadly, to step in and provide oversight and verification, as the controversy and ambiguity over exchange proof-of-reserves projects has shown.
Over the next year, my expectation is that these institutions will develop naturally as users learn where to place their trust, mitigating the need for external regulation, and allowing the industry to better meet the challenges it faces.