Our colleagues Adelle Nazarian, CEO of the American Blockchain PAC, and Alex Allaire, CEO of the American Blockchain Initiative, recently proposed chartering a self-regulatory organization (SRO) for the decentralized finance (DeFi) sector. Doing so would advance U.S. President Joe Biden’s executive order calling for the responsible development of digital assets, arguably the most consequential presidential technology initiative since John F. Kennedy’s speech at Rice University launched America’s magnificent moonshot.
Much regulation of the financial industry is undertaken by self-regulatory organizations (SROs). Examples? The Financial Industry Regulatory Authority (FINRA) and the New York Stock Exchange.
Todd White is the founder of, and Ralph Benko the senior counselor to, the American Blockchain PAC.
They provide substantial public protection while avoiding many problems associated with inadequately funded regulators, doing their jobs often without the level of resources needed to allow them the nimbleness to protect consumers while not stifling innovation with compliance costs and red tape.
The financial industry itself, collectively, has greater domain expertise than can be expected of regulators. This reality invites transparent, fully accountable, self-regulation.
Formalized self-regulation is a model that the crypto sector would be smart to emulate, both for practical and reputational reasons.
Republicans now make up a slim majority in the House of Representatives. Notwithstanding their internal squabbles, the majority of Republicans trend deeply skeptical about government regulation. SROs constitute a well-tested, appealing, middle path.
Should Uncle Sam recognize a new, dedicated, SRO for digital assets? Or encourage broadening the mandate for an existing one, such as FINRA, which, among other things, licenses securities dealers and promotes ethical practices?
Good question. We respectfully submit that the House Financial Services Committee and the Senate Banking Committee in the upcoming 118th Congress would do well to tackle not whether, but how best, to recognize an SRO to police the sector in such a way as to protect the public while not stifling innovation.
We encourage the digital assets sector to come together to consider how to articulate and promulgate smart rules to encourage what President Biden has called for: the responsible development of digital assets.
Read more: Time for Crypto to Make Nice With Regulators | Opinion
No need to reinvent the wheel. Much may be learned by starting with a review of FINRA’s regulations, set forth here.
The protective ethos is crystal clear. Per FINRA: “FINRA is here to help keep investors and their investments safe. To ensure this protection, we enact rules and publish guidance for securities firms and brokers. We involve a number of interested parties in rulemaking deliberations so that broker-dealers and investors can have confidence they are collaborating on a level playing field. Our relationship to these participants, as well as the SEC, puts us in the unique position to guard the integrity of the market.”
Reflecting an equivalent ethos – a level playing field, guarding the integrity of the market, just and equitable principles of trade, free and open markets, and protecting investors and the public interest – it should be reasonably straightforward for FinTech to develop and administer effective rules.
Offering self-regulatory entities and formulating best practices, let the sector present its findings to Congress. From there, it should be possible to forge a political consensus as to how to advance the general welfare while fostering fintech innovation.
Anything traditional finance could do, we can do better.
Let’s stick with forming institutions that are based around the fiduciary ethos that pervades the financial industry, opening the door to innovation while enhancing, rather than diluting, public protection.