Momentum Builds for SRO to Regulate Digital Currency

Winklevoss twins
Winklevoss twins, Founders Gemini Trust Company

Momentum continues to build for a self-regulatory organization (SRO) to emerge to help regulate digital currency.

The Winklevoss twins, whose feud with Mark Zuckerburg formed the basis of the movie The Social Network, about the beginning years of Facebook, have provided a statement backing an SRO in digital currency.

“As part of Gemini’s mission to build the future of money, we believe in the importance of thoughtful regulation in the virtual currency industry. Starting in 2014, we worked with the New York State Department of Financial Services (NYSDFS) to obtain a trust company license for Gemini’s exchange and custody business. In 2017, as part of the development of the Cboe Bitcoin (USD) Futures Contract, we entered into an Information Sharing Agreement with the Cboe Futures Exchange (CFE), owned by Cboe Global Markets, Inc. (Cboe) and registered with the Commodity Futures Trading Commission (CFTC), to allow CFE to perform cross-market surveillance of Gemini’s marketplace. Lastly, we have adopted an internal Trading Policy with respect to material nonpublic information, as well as Marketplace Conduct Rules for all trading on our marketplace, in an effort to foster a rules-based marketplace.

“With that said, there has been recent discussion among U.S. regulators and legislators about the need for further oversight and self-regulation of the virtual currency industry. When evaluating this need, it is important to first note that the term virtual currency (often used interchangeably with the terms “digital asset,” “digital currency,” or “cryptocurrency”) can refer to different asset types including virtual commodities like bitcoin, and separately, tokens built “on top of” blockchains that are securities (i.e., “security tokens,” which are sometimes issued via initial coin offerings (ICOs)). 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. The legal status of whether or not a token is a security (i.e., not a virtual commodity) is determined by the Securities and Exchange Commission (SEC), which has traditionally been guided by the Howey Test and other SEC enforcement precedent when making these types of determinations. Unlike virtual commodities, security tokens and cash markets for security token transactions fall under the direct jurisdiction of the SEC and the federal securities laws, rules, and regulations.”

The Winklevoss twins have been making a great deal of noise related to digital currency recently.

According to a February 2018 Forbes story, the twins began investing in bitcoin in a big way starting in 2012.

The story went on to note: “They also built a lucrative New York-based cryptocurrency exchange, Gemini, where investors can buy and sell digital currencies. Before opening the trading platform in 2015, the ‘Winklevii’ worked closely with New York regulators. ‘Our philosophy is to ask for permission, not forgiveness,’ Cameron Winklevoss has said.”

They’ve recently predicted that bitcoin would have a $5 trillion market cap in the next ten to twenty years.

The announcement by the twins was cheered by Commodities Futures Trading Commission Commissioner Brian Quintenz who said in a statement: “I congratulate Cameron and Tyler Winklevoss on their energetic leadership and thoughtful approach in outlining a virtual commodity self-regulatory organization (SRO) concept.

“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. I encourage Gemini (or any other market participant, advocacy group, platform, or firm) to be aggressive in promoting these qualities within any SRO construct.”

Last week, while speaking at the Blockchain Summit, Quintenz also suggested it was time for an SRO to regulate digital currency.

An SRO is a creation of the government but functions independently. The Financial Industry Regulatory Authority (FINRA) is an example of an SRO in the trading world.