This post is part of CoinDesk's 2019 Year in Review, a collection of 100 op-eds, interviews and takes on the state of blockchain and the world.
Blockchain is disrupting traditional finance, but will never overtake it without the same legal protections as its outdated predecessor. That’s Yusuf Hussain’s wager.
As president of the Virtual Commodities Association (VCA), Hussain is attempting to map tried and true financial governance structures to crypto. Namely, he’s leading the Winklevoss-backed VCA’s efforts to become a self-regulatory organization (SRO). If successful, an SRO will allow industry participants to manage their own affairs – including setting standards for ethics, conflicts and judgments – akin to the Financial Industry Regulatory Authority (FINRA) for brokers (the intermediaries for trades involving equities, corporate bonds, securities futures, and options).
Comprised of four cryptocurrency exchanges – Gemini (where Hussain works as head of risk), bitFlyer, Bittrex, and Bitstamp – and a litany of commercial consultants, law firms, and compliance experts, the non-profit VCA aims to develop "well-formed, sensible regulation."
In an interview in November, Hussain said the industry is already moving in this direction. "We're seeing less resistance from exchanges claiming regulation is antithetical to crypto," he said.
Also discussed was how maturation will become a competitive advantage, and how traditional finance maps onto crypto.
You have feet in both the world of risk and regulation as head of risk for Gemini. Could you explain the overlap between your two roles?
The biggest connection between the two roles is that both the organization and the industry share the same risks: regulatory uncertainty. At any risk management practice, they identify the main remedial activities to close the gap. I’m looking to address this uncertainty at the VCA. Gemini has a number of employees with backgrounds in traditional finance or tech. Our prior lives inform what we think crypto’s rules and regulations should look like.
Could you describe the process of applying for SRO status?
The VCA is one of a handful of associations out there looking to obtain the SRO designation. There are a number of different ways to get the designation. At the bare minimum, an existing regulatory body would have to sponsor the association and present it to Congress, where a bill would be passed designating it as SRO. The VCA recognizes that there is a specific path through legislation, similar to how the CFTC [Commodity Futures Trading Commission] and SEC [Securities and Exchange Commission] designated SRO responsibility over broker dealers and futures contracts markets.
If you distill it, an SRO has two components: enforcement and cross-market surveillance. At the VCA, there are six committees; two focus on enforcement and cross market surveillance. So we’re building to that vision, and we have relationships with both the SEC and CFTC.
How does the existing regulatory framework map onto the crypto industry?
In the U.S. you have roughly 13 exchanges where you can buy or sell commodities or securities. Retail investors can’t buy those assets directly but have to go through a broker-dealer or register with the NFA [National Futures Association] as a futures contracts merchant. Broker-dealers are registered with an SRO to place orders on a market. Once a broker places a trade on an exchange on your behalf, there’s action behind the scenes to make sure you have the money and the counterparty has possession of the stock you want to buy.
That’s referred to as clearing and settlement, which usually takes two to three days, a number of counterparties and also a depository and trusted intermediaries. With crypto, a retail consumer can directly interact with an exchange or choose to interact with a broker-dealer. Blockchain lets consumers buy and sell directly because the clearing happens instantaneously on an exchange. An exchange can play multiple roles because blockchain affords efficiencies and consolidations.
When Gemini builds out products, we ask where it plays out in traditional industry and which agencies' remit does it fall under. A single exchange can offer a plethora of products from futures to ETFs to spots for commodities, stablecoin for foreign exchange and securities when that framework is finalized.
What’s the deal with the bitcoin ETF delay?
Speaking on behalf of VCA, the SEC has rejected ETF proposals since 2018. It recently sent a 100-page rejection letter, which maintained consistency with [its] previous rejections, citing market manipulation concerns. The VCA wants to enable the sharing of data to enable cross market surveillance, which is a vested interest for the industry. Speaking behind closed doors with the SEC and CFTC, they say cross-market surveillance is necessary for maturation.
What were the most important developments this year?
The amount of attention from federal and state regulators. But the discussion has increased globally. There are other jurisdictions looking to pave the way for crypto adoption. There’s a risk the U.S. will fall behind.
There’s also been a slight change in narrative. Where crypto exchanges and custodians once said, "we don’t need the AML [anti-money laundering] or other regulations... it’s the antithesis of crypto," they’re coming around in learning you can’t challenge the most heavily regulated industry in the world without the appropriate sensible regulation.
Do you think the regulators directed their attention in response to Libra?
Not only. There have been a number of bills. When I started the Token Taxonomy Act was being floated. Now the register has a number of bills around crypto, some of which may have been incited by Libra, but broadly speaking the conversation is ongoing. We have a lot of educating to do on what crypto brings, so the bills are appropriately worded. To be honest, I prefer not to comment on Libra. The Gemini founders have already publicly commented.
Any that you expect to pass?
The things I hope to happen are the designation of SRO status to a crypto association. We’ve established the right relationships.
Can you share the VCA’s view on the security/commodity transition?
Each member organization has its own listed framework on what it means to be a security or commodity. Gemini is very particular to ensure only digital assets considered commodities are listed. The conversations happening are how to build a framework that explains how crypto fits into the Howey Guidance.
When applying traditional financial rules, you always see a knee-jerk reaction from crypto. The key is sensibly applying the rules and regulations.
Do you think there is an internal conflict in exchanges between privacy and transparency?
A lot of exchanges think their implementation of custodial infrastructure is the secret sauce. There's a way to provide transparency without giving over the details of your competitive advantage in your SOC reports. Institutions that have trade secrets but continue to provide transparency through attestations is proof that there’s an appropriate way to disclose. After the exit scams and hacks over the years, it’s harder to claim you’re secure and have customers trust you versus having a trusted, reputable audit by one of the “big four” [accounting firms].
Gemini has a head start in minimal compliance burden. We’re not after short-term profits but playing the long game, by building a sustainable product. When regulation does come, we’ll be ready. It’s a competitive advantage and it’s how one day regulation will drive revenue.